When I was younger, there was a time when I didn’t have any savings to fall back on. I had money coming in each month, but was spending all of it instead of saving any. If I could go back and talk to my younger self, I’d tell him to invest in some income shares to benefit from the dividend payments. If I was in that position today, here are the stocks I’d buy.
How income shares can translate to savings
Before I get to the specific stock ideas, I want to think about the big picture. I’m going to assume that I have £0 in my savings account. With my earnings, I’m also going to assume that I can trim back on some nights out, new clothes and other spending habits to enable me to free up £200 a month.
In practice, I can then put this £200 into dividend stocks each month. If I target a dividend yield of 8%, I could quickly build up my savings. From the first year, my total pot would pay me £192 in income. I could bank this straight away.
Over time, my savings would start to tick over. In four years’ time, I’d be able to save £768 via the dividends paid. This also wouldn’t include any shares that I sell for a profit along the way.
I do admit that these numbers aren’t set in stone. If a firm cuts the dividend, I wouldn’t get that potential income. In that case, I’d have to be smart and reallocate my money to another company that has a better track record of payouts. And I have to accept that I wouldn’t always be able to sell my shares for a profit. In fact, in some ca,ses the price of my holdings might go down.
Ideas that I like right now
If I was starting from scratch, I’d want to really focus on stocks with good dividend growth rates over several years.
For example, Smurfit Kappa has had a compound annual dividend growth rate of almost 10% over the past five years. It also has a decade of consecutive dividend growth. This ticks boxes for me.
The dividend yield is 3.98%, which some might find to be a bit too low to get excited about. But I’m focused here on money that I can have confidence will continue to be paid in years to come. From that angle, I’d rather have a high probability of receiving 3.98% than a very low probability of receiving double or triple that!
I can find other companies that have higher dividend yields, but the risk does also start to increase. Rio Tinto has a very high compound annual dividend growth rate of 36%. The growth in the dividends in recent years means that the dividend yield sits at a whopping 13.61%.
However, the share price has fallen by 18% over the past year, with a tumble in recent months due to some core commodity prices falling. I still think the reward makes enough sense for me to buy shares in the company for income, but it highlights the unpredictability associated with future dividend payments.