UK dividend shares are companies that pay out income to shareholders. If I buy shares in the business, then I become a shareholder. In this way, I’m entitled to the dividend paid out, and can work out my payment amount depending on how many shares I own and the dividend-per-share. Over time, I should be able to build up my dividends to a level I’m happy with. In this case, I’d like to generate £250 a month.
To begin with, I need to assess how much I can afford to invest. This will then dictate which UK dividend shares I need to buy in order to make £250 a month.
Each UK dividend share offers a constantly changing dividend yield. This calculation looks at the ratio of the last dividend-per-share that was paid, relative to the current share price. The share price changes all the time, as does the dividend yield. However, if I’m looking to invest right now, the swings in the yield over the course of a day or two shouldn’t materially change my opinion.
Investing an upfront sum
The larger amount of money I can invest upfront, the lower the dividend yield I need to target. For example, the FTSE 100 average dividend yield sits around 3%. So if I had £100k to invest, I could achieve my goal of £250 a month in dividend income just from the average yield.
The benefit of this method is that I don’t need to take on high levels of risk for my investment. If it’s the average yield, the companies I pick at this level should be stable. The downside is that the initial investment needed into UK dividend shares is quite high.
A second way would be to target a much higher dividend yield, enabling me to invest a smaller amount. I could buy several stocks that offer a yield between 6% and 7% instead. At this level, I’d only need to invest around £46k to begin with to make £250 a month.
This is much easier on my cash demands, so could be preferred. However, I do need to watch out as I’m targeting the highest dividend yields possible in the FTSE 100 index. In most cases, the higher the yield, the higher the risk associated with the income payments.
Regular investments into UK dividend shares
Instead of going for an investment into UK dividend shares all in one go, I could look to invest every year, quarter or month. I’d prefer to make monthly investments. If I invested once a year, I could have missed out on some opportunities within that year. After all, the market moves quickly (think about the stock market crash and reversal last March/April).
If I invested £1,000 a month, I could build up to my level of £250 a month in income. As with before, I could choose the dividend yield to target. This would impact how long it would take for my pot to build up. At a 3% yield, it would take me just over seven years. At a 6% yield, I would hit the mark in-between years three and four.
Of course, I have to remember that my returns aren’t guaranteed and I could lose money as well as make it. For that reason, I’d diversify my investments to ensure I’m not over-exposed to one company or one sector.