It’s not much of a surprise, but coffee in central London is painfully expensive. I recently paid £5 for one and it still bothers me today! Granted, there’s nothing wrong with buying a coffee when I’m out and about. Yet it’s worth stopping and thinking about the potential alternative use of that money if it was invested in dividend shares.
Saving up, investing wisely
I’m not suggesting that each day I invest £5 in an income stock of my choice. The transaction fees would be extortionate and render the whole exercise pointless. What I’d rather do is save the £5 each day and invest the sum of £150 each month (assuming 30 days in the month).
From this angle, the £150 has enough weight to add value to my portfolio (even if I’m starting out from zero). The key isn’t so much the amount I invest, but the dividend stocks I target.
At the moment, the FTSE 100 average dividend yield is 3.74%. Yet this includes nine stocks that have a yield of less than 1%. So if I’m active and pick the shares myself, I feel I can easily boost my yield to the 6% level.
Some stocks that I’d include if I was implementing this idea today would be Land Securities (6.14% yield), NatWest Group (6.46%) and Aviva (8.06%).
My preference would be to invest the £150 each month in a different stock. Over time, this would give me a nice mix of sectors that acts to diversify my income stream.
A couple of notes of caution
Before everyone stops buying coffee, there are some points to note. I’m obviously gong to try and pick dividend shares that are sustainable and have a good track record of paying out money. Yet it’s impossible to perfectly predict the future.
For example, NatWest might struggle with loan defaults on mortgages due to high interest rates. This might cause it to cut the dividend next year thanks to lower earnings.
Another element is the reinvestment risk. When I get paid a dividend, I’m going to invest that money back in the market. This helps to compound my returns. Yet the dividend yield will change over time. When I reinvest, it might be a lower yield than I initially expected.
Making £10k a year
If I keep investing the coffee money each month, I’ll potentially have a pot worth just under £167k after year 32. From the following year, my portfolio should generate £10k just from passive income.
This also doesn’t take into account any capital gains from share price increases over that period. Given the long-term trend of the stock market, I’d be fairly confident that I’d be able to enjoy some gains over that period too.
