Sometimes it can be hard to get a realistic investing goal. Obviously, I would like my stock investments to increase a hundredfold to make me a millionaire overnight. Such short-term goals can end up being tough to reach, and can demoralise me when it doesn’t happen. Instead, setting a goal of making a certain amount of money from my investments is easier to quantify. Via dividend income, I can plan now to see how much I can make in the future.
Setting the right goals
Let’s say that my goal is to make £1,000 a year in dividend income. One of the elements that makes it possible to plan ahead is that dividends usually get paid each year. I can look at the track records of different companies and see the historical dividend that has been paid. Using these numbers, I can forecast ahead to work out how much I will likely get paid per share if this stays the same.
A point of caution here is that there is no guarantee that the dividend has to be paid. Dividend income is based on the discretion of the business. Events such as the pandemic can mean a dividend cut. For example, last year Royal Dutch Shell cut the dividend payment for the first time since the Second World War!
So although I do need to be careful on forecasting the dividend income, black swan events don’t come around that often. Actually, the fact that Shell hadn’t cut their dividend in several decades prior to 2020 is a testament to the regular dividend payments that I could expect to achieve.
Once I’ve established which companies I feel offer me safe and sustainable dividend payments, I can then look to add in the numbers and see how long it’ll take me to achieve my goal.
Crunching dividend income numbers
My monthly investment amount is £100. Whether I invest this in one company per month or into several doesn’t bother me too much. The main point is that I’m going to be averaging a certain level of payments. The typical way to measure this is via the dividend yield. This is a ratio that looks at the current share price relative to the dividend per share.
I’m going to assume that I’m averaging a 5% dividend yield over time. I’m also going to take any dividend payments and reinvest them back into more dividend paying stocks until I reach my goal. Using these figures, it’ll take me just over 12 years in order to reach my goal. In year 13, I’ll have an investment pot worth over £20,000. This will then pay me out £1,000 a year in dividend income.
I think this goes to show that setting a realistic investment goal and going through the numbers can help me to get going. Although I need to be careful about being overly confident in forecasts, picking sustainable dividend paying stocks can help to reduce the risk.
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jonathansmith1 has no position in any share 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.