The Motley Fool

How I’d seek to turn a £2,000 investment in UK income shares into £3,000

Image source: Getty Images.

A bit of extra income always sounds good to me. That’s one of the reasons I invest in UK income shares.

While it can be tempting to spend the extra income, over time it can add up to substantial growth of my original investment. Here is how I would invest £2,000 in UK income shares today in the hope of turning it into £3,000.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Sectoral diversification

I would want to reduce my risk by investing in diverse shares. Sometimes a whole sector can fall out of favour. So by diversification I don’t just mean between companies, but also sectors.

With £2,000 in hand I would likely choose four names, putting roughly £500 in each of them.

Choosing high-yield sectors

Then I would look at which sectors offered a high yield. It is easy to find information about the highest yielding shares, so I would likely start there and see what sectors cropped up.

One point to make here is that such data is often backwards looking. That is a useful guide. But for my income plan, I would pay attention to the possible future payout rate. Dividends are never guaranteed, but I would pay attention to any likely shifts in profitability.

Currently, four sectors I would pick for UK income shares are tobacco, financial services, energy, and retail.

UK income shares I’d pick

For tobacco, I would buy into Imperial Brands. A decline this week due to concerns about possible changes to US nicotine level rules provides me with a buying opportunity. It also highlights longer-term risks that lower demand could reduce profits in future. A yield of 9.4% suggests my £500 could generate around £47 annually in passive income.

In financial services, I would choose M&G. The company pays a dividend equivalent to 8.6% of the current share price. So £500 would earn around £43 a year at that level. M&G recently increased its dividend by around 2%. However, one risk is that any economic downturn could lead to a reduction in investment activity, which would hurt M&G’s profits.

For energy, I’m tempted by the yield of Diversified Oil and Gas. But its limited history as a listed company means I don’t feel comfortable estimating its future payout level. So I’d probably plump for BP. The oil major cut its dividend last year, but still offers a prospective yield of 5.4%. That would equate to £27 a year for my £500 stake. BP’s move into renewable energy might boost future returns – but if margins are lower, it could damage them.

Finally retail operator Tesco yields 4.4%, or around £22 a year on a £500 investment. Tesco is a bellwether UK retailer that last week maintained its final dividend. But as the results showed, risks include increased costs for online fulfilment.

Passive income streams

Taken together, these four UK income shares could offer me around £139 in passive income. That might not sound much, but it would help me get to my target of turning £2,000 into £3,000. If the dividends were maintained, I could achieve that target in under seven years.

It could be faster if dividends are increased, although they could also be cut or cancelled. Another way to speed up achieving my goal would be to reinvest the dividends instead of keeping them in cash.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

christopherruane owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Tesco. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.