£5 per day doesn’t sound like much. You probably think it’s not enough to invest in the stock market.
But £5 per day is £150 per month. And as I’ll explain, I think this could be enough to build a profitable stock market income fund.
How does this work?
A typical dealing charge of £10 would wipe out 6.6% of your £150 monthly budget in one trade alone. That’s no good. The secret to investing small amounts in stocks is to use regular investing plans. These allow you to buy the same stocks on a scheduled day each month, for a much lower fee.
Of course, this discount doesn’t apply to selling stocks, where the full dealing charge will apply. So our mission is to buy stocks we’re unlikely to want to sell. Difficult, but not impossible.
Here are three stocks I’d be happy to spend £50 on each month, to build a long-term passive income.
Generous payout funds 6% yield
My first choice is home and motor insurer Hastings Group (LSE: HSTG). Like most insurance companies at the moment, growth is slow but the business generates plenty of spare cash. Most of this is returned to shareholders through generous dividends.
Hastings’ 2018 results show that the number of active customer policies rose by 2.5% last year, while net profit rose by 3% to £130.6m. The company expects more of the same in 2019, and has decided to increase its dividend payout ratio to reflect limited growth opportunities.
For 2019, the dividend payout ratio will increase to between 65% and 75% of earnings. Based on current forecasts, I estimate that this will gives the stock a forecast yield of 6.6% for 2019. I’d be happy to buy and hold the shares for income at this level.
Profit from China growth
My next pick is luxury fashion brand Burberry Group (LSE: BRBY). This company can trace its history back to 1856 and remains popular and highly profitable today. One particular attraction is that investing in this business provides direct exposure to growing wealth in Asian markets, especially China.
Another attraction is that this firm’s upmarket appeal means that historically, it’s always bounced back quickly after recessions.
The final reason why I’d buy is that this business is very profitable, with a return on capital employed of about 25%. This helps to secure strong cash generation to support dividend growth.
The shareholder payout has grown by an average of 7% each year since 2013, well above inflation. Although the starting yield seems low at 2.2%, I expect continued long-term growth.
A drink that’s loved by millions
My final pick is soft drinks group Nichols (LSE: NICL), which makes Vimto, Sunkist and a range of other popular soft drinks. Vimto was invented 110 years ago by the grandfather of company chairman John Nichols.
Like Burberry, this family firm enjoys high profit margins thanks to the strength of its brands. An operating margin of 22% helped to lift pre-tax profit by 4% to £31.8m in 2018. Strong cash generation meant that the company was able to increase the dividend by 14% to 38.1p per share last year.
If people have been drinking Vimto for 110 years, I suspect they will continue to do so. The starting dividend yield of 2.5% may seem modest, but this payout has doubled in six years. A stock I’d buy and tuck away.