I think generating a second income from dividends is possible with the right mindset. Of course, I have to remember that income shares can often fall in price. Therefore, I’m looking for a quality company that should grow in value as well as pay out some of its earnings to me.
If I started with just £1k, I could buy 63 shares of Rathbones Group (LSE:RAT), the UK’s largest discretionary fund manager.
Investment essentials
Rathbones is an investment and wealth management service company that offers its work to private clients, charities, and trustees.
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My £1k could buy 63 shares at the current price of £15.80, for a total investment amount of £995.
As the chart below reveals, the shares are currently down 44% from their all-time high. However, that’s no trouble, as it means they’re cheaper for me to consider buying now!
Risks and rewards
The dividend yield of Rathbones is the major selling point for me, at a nice 7.5%. Also, its valuation is appealing on closer analysis. It has a price-to-earnings ratio of just 10 if I consider future income!
Being the largest discretionary wealth manager in the United Kingdom comes with some level of security. Knowing I’m investing in such a reputable company makes me more confident that a good dividend will be maintained.
It became so large through a deal with Investec, combining the businesses in a strategic move to enhance market presence. I see this as a huge benefit to both firms, creating massive long-term value.
Of course, there are risks specific to the business. I think its balance sheet is relatively weak right now. I’d like to see fewer debts on the books to help protect the firm in case of unexpected economic hardships.
Also, its profitability can improve. With a net income margin of just 9.5%, it’s not the top in its industry in terms of earnings.
How I reinvest my dividend income
Dividends can be a fantastic way for me to pay my bills, but personally, I’m leaving that for retirement. If I’m still in the working period of my life, I think it’s best I toil hard, save up my investment pot, and live off a healthy passive income later.
Reinvesting dividends is quite simple. Every time I receive income in my trading account, I just choose exactly the shares I want to reinvest the money back into.
Maybe I’ll choose the company the income came from, but also, maybe I’ll choose a business I’ve not invested in before that’s caught my eye. My trick is to keep buying and reinvesting in great businesses over the long term.
At the moment, my portfolio is full of around 15 companies, and I don’t have the spare £1k to allocate to Rathbones Group. Nonetheless, if I was nearer retirement, I’d certainly consider it. After all, passive income can be very useful.
