Income shares can be used by investors to build up a future cash stream. Even though the dividend payments can be enjoyed right away, by reinvesting the proceeds and allowing compounding to flourish, your future self will likely be thankful for having patience. So how could someone set up this strategy to hit a four-figure monthly sum in 2036?
Making plans
The first step is to determine what a realistic annual rate of return could be. There’s no point forecasting something for the next decade that’s unrealistic, only to get disappointed further down the line.
For example, even though there are stocks with dividend yields above 10%, I think it’s a bit ambitious to target this for the portfolio each year. At the other end of the spectrum, I think it’s easily possible to beat the FTSE 100 average yield of 2.84%.
By active selection, I believe a dividend portfolio could target a yield of 6%-8%. This would maximise potential reward while avoiding very-high-risk stocks.
From there, we can do some reverse engineering. With an average yield of 7%, earning £1k a month in 2036 would mean the portfolio at that point would need to be £171.4k. In theory, someone could invest that lump sum now. Yet it’s unlikely that many have this much money ready to go. An alternative option would be to invest just under £1,000 a month. If dividends are compounded over the next decade, this could reach the £171.4k needed.
Of course, trying to predict anything a decade down the line is tough. The world can change rapidly, negatively impacting companies and future dividend flows. However, it provides a guide to the ballpark figures and yields needed to make the goal a reality.
Property in focus
One stock that could be considered for this goal is AEW UK (LSE:AEWU). The real-estate investment trust (REIT) share price is up 11% in the past year, and it boasts a 7.25% dividend yield.
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The managers focus on a diversified portfolio of small- and mid-sized UK commercial properties, mostly outside London. Unlike some other REITs, it actively looks to buy mispriced properties, which it then improves and leases out. Not only does this act to increase rental income, but it can also help secure capital appreciation in the future by hopefully selling at a higher price.
This gives it a good angle not only for income via dividends but also for share price gains. That’s because the net asset value of the portfolio increases over time.
From a sustainability perspective, the average lease term is over five years, and the loan-to-value on the properties is around 25%. This provides long-term revenue security and low risk from interest rate changes. However, one risk is that the commercial property market is cyclical. If the UK economy underperforms in the coming couple of years, it could pass through to weaker tenant demand for AEW.
Even with this, I think it’s a good stock for income investors to consider.
