Image source: Getty Images
When I was younger, there was a time when I didn’t have any savings to fall back on. I had money coming in each month, but was spending all of it instead of saving any. If I could go back and talk to my younger self, I’d tell him to invest in some income shares to benefit from the dividend payments. If I was in that position today, here are the stocks I’d buy.
How income shares can translate to savings
Before I get to the specific stock ideas, I want to think about the big picture. I’m going to assume that I have £0 in my savings account. With my earnings, I’m also going to assume that I can trim back on some nights out, new clothes and other spending habits to enable me to free up £200 a month.
Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!
In practice, I can then put this £200 into dividend stocks each month. If I target a dividend yield of 8%, I could quickly build up my savings. From the first year, my total pot would pay me £192 in income. I could bank this straight away.
Over time, my savings would start to tick over. In four years’ time, I’d be able to save £768 via the dividends paid. This also wouldn’t include any shares that I sell for a profit along the way.
I do admit that these numbers aren’t set in stone. If a firm cuts the dividend, I wouldn’t get that potential income. In that case, I’d have to be smart and reallocate my money to another company that has a better track record of payouts. And I have to accept that I wouldn’t always be able to sell my shares for a profit. In fact, in some ca,ses the price of my holdings might go down.
Ideas that I like right now
If I was starting from scratch, I’d want to really focus on stocks with good dividend growth rates over several years.
For example, Smurfit Kappa has had a compound annual dividend growth rate of almost 10% over the past five years. It also has a decade of consecutive dividend growth. This ticks boxes for me.
The dividend yield is 3.98%, which some might find to be a bit too low to get excited about. But I’m focused here on money that I can have confidence will continue to be paid in years to come. From that angle, I’d rather have a high probability of receiving 3.98% than a very low probability of receiving double or triple that!
I can find other companies that have higher dividend yields, but the risk does also start to increase. Rio Tinto has a very high compound annual dividend growth rate of 36%. The growth in the dividends in recent years means that the dividend yield sits at a whopping 13.61%.
However, the share price has fallen by 18% over the past year, with a tumble in recent months due to some core commodity prices falling. I still think the reward makes enough sense for me to buy shares in the company for income, but it highlights the unpredictability associated with future dividend payments.