I believe investing in dividend stocks could help me unlock a passive income stream I could spend on whatever my heart desires.
Let me explain how I’d approach this.
Rules I’d follow
I need to ensure I’m using the best investment vehicle possible. For me, that’s a Stocks and Shares ISA. This is because of the favourable tax implications on the dividends I’m hoping to earn, as well as the generous £20K annual allowance.
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 is the trickiest part of all, which is stock picking. My aim is to create the largest pot of money to draw down from, so I need to invest in the best stocks out there. This requires lots of research and due diligence. Plus, I want to diversify my holdings, as this helps mitigate risk.
Crunching numbers and risks to bear in mind
If I had £12k in a low interest savings account today, I’d put that all to work. I’d also going to add £300 per month from my wages. From a return perspective, I’m going to aim for an 8% rate of return, and follow this plan for 25 years.
After this time, I’d be left with £235,827. For me to enjoy this, I’d draw down 6% annually, which equals £14,149. Splitting that into a weekly amount would leave me with £272.
Taking into account some risks, it’s worth mentioning that dividends are never guaranteed. Next, each stock I pick has its own risks that could hurt performance and returns. Finally, although I’d aim for 8%, I could earn less, leaving me with less to draw down from.
Stock picking
If I was following this plan today, I’d buy Howden Joinery (LSE: HWDN) shares. Interestingly, I already own some shares.
It is the leading provider of fitted kitchens and joinery products across the UK, serving the home improvement market.
Howden has grown exceptionally over the years. This has resulted in earnings growth, as well as increased market share, helping the company to become the leader in its space.
From a bearish view, it would be remiss of me not to mention current economic pressures that could dent performance and earnings. Higher inflation and interest rates have led to a cost-of-living crisis. This has resulted in consumers struggling to pay essential bills, and putting home improvement projects on the back burner. From a commercial view, the home building and buying sectors have also been adversely impacted too.
However, on the other side of the coin, I reckon once volatility dissipates, Howden is well placed to benefit from improving sentiment. Plus, the housing imbalance in the UK could provide Howden with another avenue to grow earnings and returns too.
From a fundamental view, the shares offer a dividend yield of close to 3%. With a solid balance sheet, good growth prospects, and dominant market shares, I can see regular payouts ahead, as well as an even better level of return.
