Investing this much in income stocks could make £41 each day

Jon Smith explains the pros and cons of using income stocks to generate cash flow, as well as flagging up a FTSE 100 dividend idea.

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Having a second cash flow stream that’s separate from an everyday job can be of great benefit to an investor. It provides funds to either reinvest in the stock market, or to use for other lifestyle choices. Whatever the reason, the focus to begin with is on finding a viable way to make the passive cash stream. Using income stocks can be just the ticket.

Weighing up the investment case

Income shares have pros and cons. One of the largest benefits is that the yield potential can exceed that of other traditional investments. For example, at the moment the highest dividend yield in the FTSE 100 is 10.49%. Although the current yield doesn’t mean it’ll stay this high in the future, it goes to show what can be achieved.

Another reason why some like income stocks is due to the flexibility in buying and selling. Unlike some other assets that can generate cash but can take months to sell (such as property), stocks can easily be traded each day. If an opportunity presents itself, a shrewd investor can jump on it straight away and own the stock the same day.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

One risk is that dividends aren’t guaranteed. Unlike bond coupon payments, there’s no requirement from the CEO to pay shareholders a dividend. As a result, investors need to be careful about buying a stock under the illusion that future income is definitely going to be received. Should a business get in trouble, the dividend payment could be reduced.

One for consideration

With the aim of building a good pot of income, investors could consider buying HSBC (LSE:HSBA). The global bank has a yield of 6.01%, with the share price up 35% in the past year.

Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The business is benefitting from both higher revenues and also a drive for lower costs. The latest Q3 results showed revenue up 5% versus the same period last year. Factors that helped drive this included higher client activity in the Wealth Management division as well as volatile market conditions that boosted trading transactions.

At the same time, various reports have surfaced of a likely cost-cutting push this year. If this actually happens, overall profitability could improve, with the mix of rising revenue and falling costs. This could ultimately boost the earnings per share, helping to solidify the dividend payments.

Even though this sounds great, investors do need to be careful. A good chunk of revenue is based on interest income, which is sensitive to a change in interest rate. Should major central banks cut the base rate this year, this could cause interest income to fall.

Adding the figures up

If an investor considers putting £750 a month in dividend shares with an average yield of 6.5%, the investment pot could quickly start to build. If dividends were reinvested, this could compound growth even faster.

After 15 years, the pot could be worth £229.6k. The following year, this could generate £40.90 on average each day. Predicting income this far in advance isn’t an exact science. But it goes to show the potential that does exist with this strategy.

However, don’t buy any shares just yet

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Secure your FREE copy

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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