Income shares are a powerful tool that, when used correctly, can load investors’ pockets with extra cash each month. In the long run, initially, small payouts can grow into far larger ones. Eventually, it’s possible to start seeing up to £1,000 or more start to flow in. Here’s how.
Leveraging the power of compounding
Most British households only have a couple hundred pounds spare at the end of each month. These relatively modest sums may not seem sufficient to build a lucrative passive income stream with dividend-paying stocks. But that’s false.
Drip feeding capital into a portfolio steadily over time can actually be one of the best ways to build wealth in the stock market. This is especially true during periods of volatility, like the one we’re currently experiencing. Why? Because it translates into a pound-cost-averaging strategy.
Suppose a top-notch stock were to tumble due to market turbulence rather than a fundamental problem with the underlying business? In that case, a buying opportunity may have just emerged, enabling investors to bring down their average cost per share as well as increase long-term returns if the investment thesis proves correct.
This regular and consistent reinvestment approach can also be extended to income shares. Instead of taking the dividend paid in the early days of a new portfolio, most brokers will let investors automatically reinvest them. The end result is more shares in dividend-paying companies. And that means the next time shareholder payouts are issued, even more money will be earned.
This phenomenon is called compounding. And it’s a snowball effect which, given sufficient time, can start generating monumental wealth.
Turning £300 into £1,000 passive income each month
By choosing to research and pick individual stocks, a portfolio’s yield can realistically reach 6% in the current market environment without taking on excessive risk. That’s because so many shares in both the FTSE 100 and FTSE 250 are still trading at a significant discount, courtesy of the recent market correction.
If an investor is targeting £1,000 a month, or £12,000 a year, at this yield, they’d need a portfolio worth around £200,000. Needless to say, that’s not pocket change.
However, even if this custom-tailored portfolio only manages to match the market’s 8% average annualised return, achieving this milestone is more plausible than most people think. Twenty one years of consistently investing £300 each month at this rate would hit this goal when starting from scratch. And waiting another eight years could double it.
Risk versus reward
Obviously, waiting around two decades is less than ideal. And investors may have to wait even longer if another unexpected crash or correction decides to throw a spanner in the works.
Regardless, there are various ways investors can accelerate the timeline. Those able to spare another £100 each month for investments can slice three years off the potential waiting time. And by taking on more risk, investors can pursue higher returns.
Even if it’s just an extra 2%, that’s enough to hit the £1,000 a month passive income target another two and a half years earlier.
