The stock market can be both an exciting and a daunting place for many people. But above all it is hopefully a place to build one’s wealth.
That can come in the form of share prices going up over the course of time. It might also be the extra income offered by dividends.
If I wanted to target £7,300 in such income each year and had a spare £200 per month I could put towards trying to achieve my goal, here is how I would go about it.
Regular savings
£200 a month adds up to £2,400. That could form the basis fofor my stock market investment with an eye on income.
Each person has their own financial circumstances and set of priorities. So I would set a monthly contribution target that seems right for me. That could be £200 now, but it might move up or down in future as circumstances change.
What I would try not to change, though, is the habit of regularly saving a set amount to build funds I can put to use in the stock market.
To do that, I would set up a share-dealing account or Stocks and Shares ISA.
Using money to earn money
How would those shares help me to earn income? In short, the answer is dividends.
Dividends are like a slice of a business’s profits it pays out to shareholders, based on how many shares they hold.
Clearly this could mean that using my £200 a month to buy shares might help me build significant extra income streams over time.
But not all shares pay dividends at any given moment, even if they have done in the past. So I would take care to find what I felt were the most promising looking shares for me.
Not only that, but I would look for a few different ones so that my portfolio was always spread over a range of businesses.
Looking for dividend shares to buy
If not focusing on a company’s past – as it may not be the same as what happens in future – how might I find shares to buy?
Let me illustrate with an example of a dividend share I bought last year, Vodafone (LSE: VOD).
In choosing it, I stuck to an area I understand. I expect telecoms to benefit from large, ongoing demand. That should be good for an operator like Vodafone.
It has some specific advantages I think could help set it apart from competitors. For example, it has a well-known brand and very large customer base in Europe and Africa.
That could help it pay beefy dividends. At the moment, the yield is 11.7%. Can that last? One risk I see is the firm’s big debt pile. Paying that down could eat into earnings, leading to a dividend cut. On balance, though, I see Vodafone as offering appealing income prospects.
Aiming for a target
11.7% is a high yield. Even if I managed to earn an average 7% yield, £2,400 would earn me £168 in a year.
But what about my target of £7,300 in extra income each year through stock market investment?
If I kept putting aside £200 a month to invest and reinvested my dividends, after 21 years I would hopefully have a portfolio earning me over £7,300 every year in dividend income!
