Passive income can be generated from a variety of different assets. One of the methods I prefer is to buy dividend stocks. Over time, building a portfolio with the goal of income generation can yield substantial results. Here’s how an investor could go about it to end up with £2.5k of monthly cash flow.
Playing the long game
An important note before we get going is regarding the use of a Stocks and Shares ISA. Within the ISA, dividends received from stocks aren’t liable for dividend tax. As a result, the full gross payment can be retained. This is important because over time, this can really add up and make a big difference. The current ISA year ends on 5 April, with the new year starting, so the £20k subscription limit resets.
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.
When considering the portfolio’s size, the key consideration is the annual yield. Put simply, the higher the yield, the smaller the ISA needs to be. At the moment, the FTSE 100 average dividend yield is 3.19%. The FTSE 250 is slightly higher at 3.52%. Yet some companies included in these indexes don’t pay out any income at all.
So by being active and stripping out low- (or no-) yielders, I believe it’s possible to have a sustainable portfolio yielding 6%. With this figure, we can then calculate that the ISA needs to be worth £500k in order to pay out £2.5k on average each month. Given the ISA limit, if starting from scratch, this would take 15 years to build with gains reinvested. Even though some may be put off by the long wait, the income does start compounding quickly. For example, after five years of investing £20k a year and compounding, the ISA could be worth £140k, generating a very respectable £720 a month in the following year.
Of course, dividends aren’t guaranteed. That means it’s not ideal to make assumptions decades in advance.
Turning to finance
One example of a stock that could offer sustainable long-term income is TBC Bank Group (LSE:TBCG). The stock is down 8% in the past year with a dividend yield of 6.87%. The business has two attractive parts. One is a dominant Georgian bank, with the other being a fast-growing digital operation in Uzbekistan. It makes money mainly from net interest income (taking deposits and lending at higher rates) plus fees from cards, payments and other services.
The dividend looks sustainable because the group is highly profitable and follows a sensible payout policy. That matters. A bank can only keep rewarding shareholders if it has enough earnings and capital left after growth. The company has both, and I don’t see this under threat any time soon.
I have a positive outlook for the firm, mainly stemming from continued growth in Georgia, which is becoming a cash cow. Then Uzbekistan adds the real juice, especially if the uptake in digital banking keeps going.
There are risks, of course. Georgia is still an emerging market, so economic or political shocks could hurt performance. Credit losses could rise if conditions worsen, and expansion in Uzbekistan might not go to plan.
Even with those concerns, I believe it looks like a solid dividend stock for investors to consider.
