Quality UK shares that pay consistent dividends could be the key to building wealth, if you ask me.
I reckon it’s entirely possible to build a nice pot of money by following a careful plan and investing shrewdly.
Here’s how I’d approach this challenge.
Things I’d do
I’d start by opening a Stocks and Shares ISA. The big reason for this is the attractive allowance of £20K per year, as well as the fact that dividends earned are not taxable.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Let’s say I was able to save and invest half of that, £10,000, to start with. Next, I’d then halve that again for future years.
Moving on, I need to pick the best stocks that offer me the chance of maximum returns. I want to ensure my dividends can pay me a good rate of return, as well as ensuring dividends are as safe as possible. For that reason, I’d look for firms that dominate their industry, or have a good set of future prospects to ensure the returns keep flowing. I’ll break down an example stock pick later.
Before that, though, let me do some quick maths. Using my example amount of £10K as an initial investment, and £5K each year after, I’d be left with £285,000 after 20 years. This is based on an 8% rate of return, and the magic of compounding helps too.
However, I must mention risks that could dent this overall pot. Firstly, dividends are never guaranteed. Plus, individual stocks come with risks that could hurt earnings and returns. Finally, despite aiming for a portfolio to earn an 8% rate of return, I could earn less, leaving me with less money.
Defensive example
One stock I’d love to buy if I was undertaking this plan is Supermarket Income REIT (LSE: SUPR).
Real estate investment trusts (REITs) are great dividend stocks, in my eyes. This is because they must return 90% of the profits they make from their income-producing property to shareholders.
Supermarket Income specialises in properties for supermarkets to operate their vast enterprises. This includes retail outlets, warehousing, and logistics facilities, and more.
I reckon Supermarket Income has defensive abilities too. This is because of the essential nature of supermarkets. We all need to eat, no matter the economic outlook.
From a growth view, a growing population in the UK, with more mouths to feed, means the business can look to grow its estate, earnings, and returns.
Looking at Supermarket Income’s level of return, a dividend yield of 8% is very attractive. It’s also in line with my ambitions as mentioned earlier.
Taking a look at some possible risks, the commercial property sector is under threat from high interest rates. This is because REITs need to borrow to fund growth. When rates are higher, this debt can be costlier. Plus, existing debt is costlier to service and pay down. I’ll keep an eye on this.
