There’s many different investment strategies, some focusing on dividend shares and others that aim purely for growth. Many include a mix of several different share classes.
I believe each individual should develop their own strategy, depending on their goals and risk appetite.
Dividends are particularly attractive because they’re a relatively reliable form of income. I say relatively because they’re never guaranteed. But with the right stocks, I believe it’s possible to achieve a regular passive income stream.
So with £20k, what’s a realistic target to aim for?
Let’s consider the highest-yielding stocks in my portfolio: Legal & General (9.2%), Phoenix Group (9.1%), British American Tobacco (8%), and HSBC (7%). Yes, some FTSE stocks have higher yields but there are other factors to consider — which I’ll get to later.
I also hold several smaller-cap FTSE 250 stocks with 6%+ yields like ITV (LSE:ITV) and TP ICAP. Altogether, I can achieve about a 7% yield on average. Naturally, yields fluctuate as prices rise and fall.
Crunching the numbers
To live comfortably, I’d need at least £24,000 a year in extra income on top of my pension. So with a 7% yield, I’d need a dividend portfolio worth about £342,850.
The FTSE 100 returns on average 5.3% price growth a year. But to achieve this, I’d need to include mostly growth shares. With a dividend-focused portfolio, I can expect about 3%.
Working on those estimates, an investment of £20,000 could reach about £367,000 in 30 years (with dividends reinvested). With a weakened economy, it could take longer. So it’s important to get started as soon as possible!
How to choose the right stocks
Things to look for in a reliable dividend stock are strong cash flows, steady earnings and a low debt-to-equity ratio.
Consider ITV. It brings in decent earnings per share (EPS), ensuring dividends are well covered with a payout ratio of 46%. Its forward price-to-earnings (P/E) ratio is 9.7, well below the industry average. It has acceptable growth potential and is undervalued by 70% using future cash flow estimates.
However, it doesn’t have an excellent dividend track record. It paused payments during the 2008 and 2020 economic slumps. This means shareholders could lose out when the economy inevitably dips again. This is in contrast to defensive stocks like BAE and Unilever which tend to weather the economy better.
It’s often considered wise to include a few of these in a portfolio.
Looking beyond numbers
Like any company, ITV isn’t perfect. But beyond the financials, I like the direction it’s headed. It’s done exceptionally well to maintain a strong market share under a tsunami of online streaming platforms like Netflix.
Just less than a decade ago, it began to lose ground as online streaming took over. The highly competitive industry remains its biggest challenge, regularly attracting new players that threaten its revenues.
But lately, its shown signs of fighting back, with the share price up 27% this year.
The broadcaster’s streaming platform ITVX has helped drive the growth. It saw a 15% increase in streaming hours and a 17% increase in monthly active users. Its production arm, ITV Studios, continues to draw in users with shows like I’m a Celebrity and Love Island.
All things considered, I think it’s a good example of a strong dividend stock.
