When it comes to dividends, UK shares are some of the best in the world. The London Stock Exchange is filled with mature industry titans offering impressive yields. In fact, looking across the FTSE 350, there are now more than 75 stocks paying out 5% or more in dividends each year. Some even venture into double-digit territory!
With so many income opportunities to pick from, investors can easily build a dividend portfolio. Even those with just £300 to spare each month can generate a substantial £40,700 income stream in the long run. Here’s how.
Earning £40,700 without lifting a finger
Regularly putting aside money each month is a terrific way to start a wealth-building journey. Even if this money is left in a boring interest-bearing savings account, in the long run, it can grow into a meaningful sum. But when put to work in the stock market, the returns can be far more substantial.
Looking at the FTSE 100, the British stock market has historically delivered around 4% in capital gains and 4% dividend yield each year for a total of 8%. However, by focusing on the more lucrative dividend opportunities in the UK’s flagship index, building a 6% yielding portfolio isn’t all that challenging. And by selecting prudently, the level of risk exposure won’t necessarily increase much either.
With that in mind, investing £300 each month at 10% for 30 years translates into a portfolio worth roughly £678,146 when starting from scratch. Flipping the switch and withdrawing the 6% yield at this stage would translate into a passive income of roughly £40,700.
Picking stocks intelligently
Obviously, the prospect of having an extra 40 grand in the bank each year without having to work for it is exciting. However, the previous calculation has made quite a few assumptions. Ignoring the threat of poorly timed market downturns over the next three decades, dividends don’t always go up.
Payments to shareholders often get put on the chopping block when market conditions turn sour. Therefore, to avoid falling into traps, investors need to hunt down income-generating businesses capable of maintaining dividends even when times are tough. Looking at my own income portfolio of UK shares, Greencoat UK Wind (LSE:UKW) seems to fit that bill.
The business generates revenue from selling clean electricity generated by its expanding UK wind farm portfolio. Since households and businesses constantly need energy even during market downturns, the group’s cash flows have been understandably resilient over the years. So much so that the firm recently hiked shareholder payouts for the ninth year in a row. And with a dividend yield sitting just shy of 8%, investors are enjoying a chunky amount of income.
Of course, even a highly cash generative enterprise like Greencoat isn’t without its risks. Renewable energy infrastructure isn’t cheap. And the group has historically relied on debt financing to fund its portfolio expansion – something that’s now considerably more expensive to do on the back of higher interest rates.
So far, the firm has managed to stay on top of its obligations to debt and equity holders. However, with no pricing power, should electricity prices fall, Greencoat’s earnings will likely fall with them. Nevertheless, the group’s track record speaks for itself, making it a risk I believe is worth taking.
