Every month, countless investors are drip feeding money into the stock market to build a passive income-generating portfolio. And in many cases, the goal is to eventual quit their job and live off dividends (tax-free when using an ISA!).
But is this actually realistic? And how much money does someone need to invest to make this happen?
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.
Crunching the numbers
Today, the average salary in the UK is roughly £37,000 a year. But let’s say an investor wants to live a bit more lavishly and set the target at £74,000 – double the average.
Looking at the FTSE 100 right now, the available dividend yield of an index investing approach is only 3.13%. And at this rate, a £74,000 passive income goal would require just shy of £2.4m.
That’s quite a substantial threshold to meet. Fortunately, by opting to craft a custom portfolio focused solely on higher-yielding opportunities, investors can move the goal posts much closers.
A portfolio consisting of high-yield stocks can realistically earn closer to 6% without taking on too much excessive risk. And at this level of payout, the required portfolio is slashed in half to £1.2m.
Let’s say the custom portfolio also generates a 4% capital gain (roughly in line with the stock market average) for a 10% total return each year. Investing £650 each month at this rate will compound into the required £1.2m in about 28 years.
So for anyone who’s just about to turn 40, there’s still plenty of time to secure a comfy retirement. And for those even younger, that could unlock an early retirement.
But which 6% yielding dividend stocks should investors be considering right now?
Exploring options
The London Stock Exchange boasts some of the largest stock market yields. In the FTSE 350 alone, there are over 50 stocks with a payout of 6%, or more. And this includes shares such as Pets at Home Group (LSE:PETS).
The UK’s leading integrated pet care enterprise serves as a one-stop shop for pet owners. But rather than just being another pet store, the company also provides all the essential services, including high-margin veterinary care, grooming, and even insurance.
Since demand for pet food and care is constant, it operates in a defensive sector. And this is further supported by growing humanisation trends driving up demand for premium products and services, where Pets at Home has more pricing power.
Of course, that pricing power is nonetheless tested during economic downturns. In recent years, the cost-of-living crisis in the UK has hampered growth. And the impact of this is clear when looking at the relatively weak performance of its share price in the last five years.
The sudden departure of its CEO and an ongoing regulatory probe into veterinary pricing haven’t exactly helped. Neither has the shift in fiscal policy resulting in wage inflation.
Put simply, the stock’s 6.2% yield is far from risk-free. But with a lot of these risks seemingly already baked into the share price, going against the crowd could prove lucrative. That’s why for investors seeking passive income, Pets at Home may be worth deeper analysis. Yet there may be even better dividend opportunities to explore.
