I’d spend £8K on income shares today to target £500 in monthly dividends

Christopher Ruane explains how he’s reacting to some of the high yields currently offered by UK income shares. Can he build long-term income streams?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up of British bank notes

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Owning income shares can be a lucrative source of dividends.

In fact, right now, the yields on many British shares look very tasty to me.

In the FTSE 100, for example, Phoenix, Vodafone, M&G, British American Tobacco, Legal & General, Taylor Wimpey, St. James’s Place and Imperial Brands all yield over 8%.

The FTSE 250 index also has a number of shares yielding that much. I count no less than 22 FTSE 250 shares that currently have yields over 8%, from 21% yielder Diversified Energy to 8.2%-yielding Foresight Solar Fund.

There are a lot of investment funds offering juicy dividend yields too. For example, one I have been eyeing in recent months as a possible acquisition for my portfolio (Henderson Far East Income) yields 9%.

Clearly, not all income shares are made equal. I would be surprised if all of those dividends survive at their current level in coming years. But I expect that some will, and may even grow. Here is how I would spend £8,000 in this potentially lucrative market to aim for a monthly passive income of £500 over the long term.

First, ignore yield!

Having started by zooming in on dividend yield, I need to explain that that is not how I select shares to buy.

After all, dividends are never guaranteed. Direct Line would have made my above list at the start of this year but its dividend is now a big fat zero.

Instead, I try to zoom in on companies I think have a strong business with a sustainable competitive edge – and an attractive share price.

Only then do I look at yield. Still, some of those high-yield income shares meet such criteria for me. I have already bought Vodafone, British American Tobacco and Legal & General shares this year, for example.

Aiming for a target income

Still, if I invested £8,000 in shares yielding 8%, that would earn me around £640 per year. That is far beneath my target of £500 per month.

Taking a long-term approach to investing, though, I would be willing to forego dividend income at first. That way, I could reinvest the dividends to buy more shares.

Such an approach would mean that, after 30 years, I ought to be earning an average £500 per month in dividend income.

If that wait sounded too long, I could always start receiving the dividend income earlier, although in that case I may need to set a more modest target for how much I would hope to earn each month.

Getting started

Today’s market conditions will not go on forever (and many even change before tomorrow).

It may be possible a year or two from now to get some high yields like we currently see in the FTSE 100 and FTSE 250.

But that is not guaranteed.

That explains why, like many investors, I am taking advantage of the current market by buying income shares now to hold for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in British American Tobacco P.l.c., Legal & General Group Plc, M&g Plc, and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., Foresight Solar Fund, Imperial Brands Plc, M&g Plc, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

Here’s how I’d aim to get rich investing £89 a week in FTSE 100 shares

Putting under a hundred pounds a week into FTSE 100 shares, here's how our writer would aim to build a…

Read more »

Investing Articles

Could this beaten-down UK growth stock be the next Rolls-Royce?

Mark Hartley feels Rolls shares have had their time and are running out of steam. Now he’s searching for the…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »