I suspect we’d all like a second income to drop into our bank accounts, without requiring any work. There are different ways to invest for income, but the method I prefer is to own good quality dividend stocks.
In this piece I’m going to explain how I’d build a dividend portfolio to target a £1,000 annual income, by investing £100 per month.
How I’d pick stocks
This wouldn’t be a speculative growth portfolio. My focus would be firmly on large, well-established companies with above-average dividend yields.
For this reason, I’d start my search in the FTSE 100, where most of the UK’s high-yield stocks can be found.
My approach would be to sort a list of shares in the index so that the highest-yielding shares were at the top. I’d then work my way down the list, choosing stocks from different sectors of the market.
In total, I’d target a portfolio of 15-20 stocks. To reach this total, I’d probably also need to include some FTSE 250 shares in order to stay diversified.
Although dividends are never guaranteed and can always be cut, I’d use a few simple checks to try and reduce the likelihood of problems.
7 dividend shares I might buy
Trying this now, one of the first stocks I get is insurer Aviva. This well-known stock currently offers a forecast yield of 8% for 2023. Checking the latest broker forecasts, I can see that City analysts expect the payout to be covered 1.6 times by Aviva’s earnings this year. For a big insurance company, that looks pretty safe to me.
Moving on down, I find British American Tobacco, with a forecast yield of 8% for 2023. Cigarette stocks aren’t everyone’s choice, but BATS hasn’t cut its dividend for at least 20 years. This year’s payout should be covered 1.6 times by earnings. Although the group has a lot of debt, I don’t expect any problems here either.
Looking further down the list, some of the other stocks I might consider today include Taylor Wimpey (7%), HSBC Holdings (7%), National Grid (5.4%), DS Smith (5.1%) and Schroders (4.8%).
How long would it take?
To keep costs down on a small portfolio, I might consider using one of the new generation of online brokers with no dealing fees. In any case, I’d probably pool my contributions for a few months before making each purchase, so that I was able to buy as many shares as possible.
Based on market conditions at the moment, I think I’d be able to build a balanced portfolio of FTSE 350 shares with an average yield of 5%. That would mean I’d need a £20,000 portfolio in order to reach my £1,000 income target.
The long-term average return from the UK market is around 8% per year, including dividends. This varies from year to year and may not be true in the future. But using this as an assumption, I estimate it would take around 11 years to reach my £20,000 target.
This method is pretty much exactly how I did build my first income portfolio some years ago. It worked well and was easy to manage. I’d be happy to do it again.