I’m convinced creating a passive income stream is possible. However, this can only happen with a well thought out plan, and investing regularly.
Let me explain how I’d approach it!
My plan
Let’s say, for the purposes of this article, that I have £20,000 saved that I want to use to start my journey.
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I’d start by putting that into a Stocks and Shares ISA. Remember, the 5 April deadline is looming for me to make the most of this year’s tax allowance.
The reason for me choosing this investment vehicle is because I wouldn’t need to pay tax on capital gains and dividends.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Next, I’d start looking for good dividend-paying stocks with excellent fundamentals, and an above-average rate of return.
I’m going to look to achieve an 8% rate of return. This is just higher than the FTSE 100 average rate of return in recent years.
With my initial £20K, and then adding a further £500 per month, over a 20-year period, I’d have amassed £393,046.26.
In order for me to bag an additional income stream, I’m going to draw down 5% annually, which equates to £19,652.31. Breaking that down into monthly income, I’d be left with a healthy £1,637.
It’s worth noting a couple of things. Firstly, dividends aren’t guaranteed. Next, any dividends I do receive, I’m going to reinvest. Finally, the rate of return isn’t certain as all investments come with ups, downs, and other risks attached. However, I may be able to achieve higher than what I’m aiming for too!
One stock to help me achieve my goal
Imperial Brands (LSE: IMB) is one of the largest tobacco firm’s in the world, and has long been a go-to stock for dividend seekers.
Now, I know what you might be thinking, how long can tobacco stocks continue to pay out handsome dividends?
There are obvious pitfalls. These include the looming spectre of changing regulation due to the ill-effects of smoking on health. Plus, the rise in ESG investing means many investors are shunning stocks like Imperial, which has hurt investor sentiment. Furthermore, Imperial does have a lot of debt on its books, which could hurt investor rewards later down the line.
However, there are a couple of points I’d balance against the arguments above. Firstly, regulatory change has allegedly been on the cards for years, and still hasn’t happened. Plus, it would take years, maybe even decades for this to be rolled out. In the meantime, I’ll look to bag dividends for as long as possible.
Next, Imperial makes cash hand over fist, and has an excellent record of growing dividends. Furthermore, its extensive brand power and reach help in this regard. Plus, it’s diversifying its products by branching out into popular tobacco alternatives, which could offer it a whole new revenue stream.
Overall, the shares look very attractive on a price-to-earnings ratio of just seven. In terms of the rate of return, a dividend yield of 8.2% is higher than the rate of return I’m hoping to achieve for my plan.
