3 dividend stocks I’d buy with just £5 per day

Roland Head explains how you can generate an inflation-beating income from small investments.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

£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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry and Nichols. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »