Traditionally, the FTSE 250 has a higher dividend yield than the FTSE 100. At the moment, this still holds true, with the index yielding 3.44% compared to its big brother at 3.04%. Based on trying to target stocks with an above-average yield in the FTSE 250, here are the numbers involved in trying to target a £15k annual income.
Main considerations
Three main factors go into making this strategy a success. The first is the timeframe. As we all know, get-rich-quick schemes are often fraught with danger. Therefore, having a long-term investment time horizon often reduces risk and allows a portfolio to grow at a steady but more consistent rate.
The second factor is risk tolerance. There’s a wide range of options when it comes to dividend stocks. Some yield just 1%, others can be in excess of 10%. Clearly, a stock with a dividend yield above 10% is riskier than one at 1%. So a decision has to be made on the average yield to be targeted. I believe there’s a sweet spot in the 6%-8% range, whereby the risk is tolerable relative to the reward.
Finally, the last major factor is cash flow needs. A portfolio will compound faster if dividends received are reinvested immediately in dividend shares. If the income is taken straight away and spent, it’ll take longer to reach the end goal of £15k in annual income.
Talking numbers
If an investor targeted an average dividend yield of 7% and was able to put £750 a month in the FTSE 250 portfolio, it could grow fast. If all money was reinvested, at the end of year 13, it could be in a position to pay out almost £14.2k in the following year. To achieve this level of dividend income, the portfolio size would need to be £202,857.
Of course, dividends aren’t guaranteed. When building the portfolio, diversification is essential. Even with this, unexpected events in the future could mean that it takes longer to reach the needed investment pot size than initially anticipated.
An idea to consider
The portfolio will need to contain solid income stocks with a good track record. One example is Primary Health Properties (LSE:PHP). Over the past year the stock is up 8%, with a current dividend yield of 7.1%.
I think it’s a sustainable dividend payer largely because its earnings and dividends are anchored to government-backed healthcare infrastructure rather than cyclical commercial real estate. What I mean by this is it owns a portfolio of GP surgeries, health centres and primary care facilities, with the end payer typically being the state. So, unless the government defaults on paying, the company has a reliable business model.
Of course, things aren’t always that simple. It can still have unoccupied properties that don’t generate any income for a period of time. It also has interest rate risk, as it sometimes borrows money to fund new projects. As a result, if interest rates stay higher for longer, this can weigh on business costs.
Yet thanks to the long-term contracts with reliable tenants, I think it’s a good stock for investors to consider as part of this strategy.
