Investing in dividend stocks through the correct vehicle, and following some careful steps, could help me unlock a second income stream.
Let me explain how I would go about it.
Steps I’d follow
As I’m aiming for dividends to build wealth, a Stocks and Shares ISA makes the most sense as my vehicle of choice. This is because of the favourable tax implications. Plus, the £20K allowance is quite generous.
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Next, I need to pick the best stocks with maximum chances of returns. I want to ensure the best chances of regular returns today, as well as future payments too. One thing I’ll look at is a firm’s balance sheet, as well as reviewing past track records. However, I do understand that past performance isn’t a guarantee of the future.
Finally, I’d want to diversify my pot. I believe approximately 10 stocks could help me achieve my aim.
Let’s say I have £15K ready to put to work and get me started. If I also invest £250 per month, for 25 years, aiming for a return of 8%, I’d be left with £347,859. At that point, I’d draw down 6% annually, which would leave me with just over £20K to spend on whatever my heart desires.
It’s worth remembering that dividends are never guaranteed. Plus, I might not achieve the 8% yield I’m aiming for. If this happens, I’d be left with less money to draw down and spend as part of my additional income stream. Finally, all individual stocks come with risks that could hurt earnings and payouts.
Stock pick example
If I was following this plan today, Land Securities Group (LSE: LAND) is the type of stock I reckon could help.
Often referred to as Landsec, the business is set up as a real estate investment trust (REIT). It invests in, and makes money from, income-producing property. Plus, REITs must return 90% of profits to shareholders, making them attractive dividend shares to investors like me.
One of the aspects I like about Landsec is its diverse assets. Many REITs specialise in one type of property. However, Landsec has a range across many sectors, including commercial, office, leisure, and more. Diversification is a great way to mitigate risk.
From a returns perspective, a dividend yield of 6.6% would go a long way in helping me achieve my aims of an additional income.
However, from a bearish view, I’m conscious of a couple of risks that could hurt the stock and returns. Debt on its balance sheet is something I’ll keep an eye on. The other is the changing demand for commercial property. For example, office space demand has fallen since the pandemic and home working trends. Landsec will need to find a way to pivot and adapt to this, or risk earnings falling.
Overall, as one of the biggest property businesses in the UK, with a £12bn portfolio, an attractive level of return, Landsec shares looks like a decent investment to me.
