How much do you need in income stocks to save £10k a year from dividends

Jon Smith points out how income stocks can act to build an investor more savings, and points out an investment trust that looks appealing to him.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Female student sitting at the steps and using laptop

Image source: Getty Images

Recent surveys reveal the average UK adult has just over £16k in savings. This varies hugely depending on age, location, and even gender, but I think we’d all agree we’d like to have more stashed away, even if it’s just for rainy-day purposes. Income stocks can offer a way to boost savings, with a concise strategy available to be copied.

Benefits of building a portfolio

The strategy’s based on owning a broad enough set of stocks that pay out regular dividends, so that each month, money is coming in. For the first few years, the income would be reinvested. This helps speed up reaching the goal of hitting £10k a year in passive income.

The broad portfolio also reduces risk. If the investor owned only one stock and it ran into difficulties down the line, all of the dividend potential could be at risk. Yet if a dozen or more companies are owned, even if one cuts the dividend, the overall yield isn’t massively damaged.

The target yield of the portfolio is essential, as it dictates how long it takes to reach the end goal. Everyone’s risk tolerance is different. Low-risk investors might want to focus on options around the FTSE 100 and FTSE 250 averages in the low 3% range. High-risk investors might push for a dividend yield of 10%. I think it’s reasonable to assume a target yield of 6%.

Talking numbers

In theory, let’s say someone invested £500 a month with this target yield. The portfolio would need to be worth £166.7k. This could be hit during year 14, meaning the investor might not have to invest anymore beyond this point and be able to save the £10k annually.

It’s plausible to do this, but I do have to caveat things by explaining that planning this far in the future isn’t perfect. There are so many factors that could change the goalposts over the next decade, potentially making this take longer than planned.

Shaking hands with the government

One example of a company that could be considered for this project is the International Public Partnerships (LSE:INPP). As the name suggests, it’s an infrastructure investment trust that focuses on public, government-backed projects.

Over the past year, the stock’s up by 4%, with a current dividend yield of 6.83%. This makes it a good fit for the style of income stock for the portfolio.

To be clear, the business doesn’t build infrastructure. Rather, it owns equity stakes in existing operational assets. Governments or public bodies make regular payments, which I think makes the dividend fairly stable. After all, these types of clients are unlikely to go bust!

I’d say the dividend’s sustainable because a lot of the contracts tied to the assets are long-term (we’re talking decades). Therefore, the income payments are typically fully covered by operating cash flow. As a result, the management team isn’t reliant on asset sales to pay income. The current dvidiend cover is 1.5x, so I don’t see any stress here.

In terms of risks, it’s exposed to any changes in political policy. If the government decides to cut budget spending or looks to shift to another provider, it could be painful financially. Yet even with this, I think it’s a stock for investors to consider.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Dividend Shares

Calendar showing the date of 5th April on desk in a house
Investing Articles

This £20k ISA could deliver almost £1,500 passive income per year

Edward Sheldon shows how building a simple dividend stock portfolio could generate a substantial amount of passive income each year.

Read more »

Two female adult friends walking through the city streets at Christmas. They are talking and smiling as they do some Christmas shopping.
Investing Articles

How much does an investor need in an ISA to target a £1,000 monthly passive income?

Harvey Jones says recent stock market volatility could be a good time for ISA investors to purchase cut-price FTSE 100…

Read more »

Happy couple showing relief at news
Investing Articles

How to aim for a £71.5k passive income from UK shares and never work again!

By regularly investing in UK shares you can potentially start earning sufficient passive income to stop work and enjoy a…

Read more »

Man hanging in the balance over a log at seaside in Scotland
Investing Articles

Should I put 100% of my cash into this dividend stock for a second income?

Parking a lump sum in this 8.5% dividend stock could yield an enormous second income. Royston Wild asks: is that…

Read more »

Portrait Of Senior Couple Climbing Hill On Hike Through Countryside In Lake District UK Together
Investing Articles

Last chance ISA: I’d aim to turn £20K into £2,000 a year in passive income

Andrew Mackie shows how an ISA strategy built on time, compounding, and quality stocks can turn a £20,000 allowance into…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This tax season, consider FTSE 100 dividend stocks to buy for a fresh ISA

When a new tax season rolls around, smart ISA investors start hunting for sustainable dividend stocks to buy. Mark Hartley…

Read more »

Workers at Whiting refinery, US
Investing Articles

Why is everyone selling BP shares?

BP shares have been some of the most sold in the last week. What's going on here? And could this…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

Is this market correction a once-in-a-decade chance to buy ultra-high-yield income stocks?

As share prices fall, dividend yields rise. The FTSE 100 is full of top income stocks and Harvey Jones says…

Read more »