I think there’s a misconception that an investor has to have tens of thousands of pounds in the bank in order to start a second income stream. I know this to be false because when I started buying dividend stocks for passive income years ago, I began with considerably less. Here’s how I could start again with relatively modest sums.
It all adds up
I believe that the trick is to set aside a small amount on a regular basis. This doesn’t mean that I’d buy a stock each day with £9. This is just time consuming. Further, when I take into account the brokerage costs and transaction fees, £9 just isn’t enough to justify buying a share. However, setting aside £9 each day which then adds up to £270 a month suddenly becomes a decent amount to invest.
With this money, I’d select my favourite dividend stock for that particular month. The benefit of doing this is that I can take advantage of movements in the market over time. For example, let’s say one share suffers a sharp short-term move lower, but I believe that this is an overreaction and the income prospects are fine going forward. This would be a great opportunity for me to jump in and buy.
The other benefit of buying a stock each month is that it builds up my portfolio and makes it diversified. Over the course of a couple of years, I’ll have a great mix of ideas from different sectors. From there, I can then invest more in my existing holdings that are doing well.
Banking on it
One idea of a stock that I’d consider buying for this strategy is TBC Group (LSE:TBCG). The Georgian bank has a current dividend yield of 6.56%, with the price up 10% over the past year.
Earlier this month, the bank released half-year results that impressed investors. Net profit jumped by 12% versus H1 2023, which is a key factor when considering how sustainable future dividends will be. After all, most dividends are paid out of earnings, so generating a profit is a huge green flag when it comes to paying out income to shareholders. A dividend of 74p was announced, which will be payable in November.
Looking forward, the business is making good progress in pushing customers online and growing its digital channels. This will ultimately allow the firm to grow faster as it can handle more customers in a cost-efficient way.
One concern is that for the bank to meaningfully grow, it’ll have to push and try to have a presence in more Eastern European countries. This is going to be a tough ask.
The numbers
If I was able to build a portfolio with an average dividend yield of 6.5%, my £270 each month would grow in value fast. If I assume that I’ll reinvest my dividends, after 12 years my pot could be worth just under £46k. This means that in the following year, I could bank £2,989 in income, which equates to £249 a month.
