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Some investors who are starting out think that they need to have thousands of pounds in savings to put into the market. This isn’t true. Although having a lot in savings can provide a great springboard to begin with, it’s not key to developing a passive income from dividend shares. Here’s how a regular but modest amount can snowball over time.
Accumulating small amounts
An investor can make use of a Stocks and Shares ISA to house the stocks for this strategy. An ISA can help to speed up the process of making passive income. This is because the dividends received aren’t liable to dividend tax. As a result, more funds can stay in the ISA and then be used to buy more shares. This can help to compound the growth process.
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.
Putting £15 each day into the ISA is a great way to be disciplined and not spend the money on other things instead. Once a month, the accumulated amount (£450) can be used to buy the potentially most lucrative dividend stock for the month. An investor might want to consider doing it this way as buying a stock every single day with £15 isn’t convenient. Not only does it take time to do, but with transaction costs it makes no sense.
Making the transaction once a month with a larger sum removes these problems. However, it’s true that it means it’ll take a year or so to have a diversified portfolio of at least a dozen stocks paying out income.
Taking advantage of opportunities
In order to try and reach the goal of making over £3k in annual income in a reasonable time, an investor would need to consider targeting stocks that have a dividend yield in excess of 6%. Fortunately, there are still plenty of options that fit the bill.
For example, one could consider Pets At Home Group (LSE:PETS). The FTSE 250 stock is down 34% over the past year. But most of this move has come in the last month.
This drop was due to the business disappointing some shareholders with the release of interim results. Group revenue grew by 1.9% versus the same period last year, with underlying profit before tax increasing by 14.1%. However, these figures weren’t as impressive as some were hoping.
The management team spoke about “a subdued market” but flagged outperformance relative to other peers. A risk is that this subdued demand continues for longer than expected, causing the company to revise down further profit estimates.
Yet the business is still very profitable, shown by the fact that it raised the dividend per share as part of the results. The fall in the share price could be seen as a good dip to consider buying, especially as the fall lower has boosted the dividend yield to 6.27%.
Potential results
If an investor could stick to £15 a day (assuming 30 days in a month) and achieve an average yield of 6%, the portfolio can grow quickly. After eight years, the pot could be worth almost £56k. This means that in the following year it could generate £3,360 in income, without having to invest another penny.
This isn’t guaranteed money. But with a sensible plan, it could yield strong results down the line.
