For generations, dividend stocks have been a great way to accumulate money. When considering long-term performance, they are, after all, the main factor influencing returns in the stock market.
Additionally, they allow investors to create reliable passive income streams with little work when utilized properly.
Naturally, investors need to have some capital to aim for a second income of £500 per month, or £6,000 annually. The FTSE 100 has yielded approximately 4% in the past. It is not too hard to achieve a portfolio yield that is closer to 5% without taking on additional risk if one is more selective and chooses individual stocks.
But even with this higher payout, a £120,000 portfolio is still needed.
That is not small change. However, it is not as hard as many may believe to accomplish this milestone if you take advantage of compounding. If anything, setting aside as little as £250 a month might be enough. So let us investigate the best way to attempt to accomplish this.
Assembling a portfolio of passive income
Savings accounts are excellent resources for wealth preservation. But they are still not very good at growing it, even in light of the most recent interest rate hikes. The opportunity to grow money is, however, significantly higher in the stock market. When examining growth indices such as the FTSE 250, it has yielded an annualized return of above 10% on average.
If one were to equal this success with something as basic as an index fund, investing a little £250 per month would, in around 16 years, result in a £120,000 portfolio. Achieving a better return could also cut down on this waiting period considerably for investors who have a talent for selecting winning stocks.
It is not ideal to wait fifteen years, to be honest. However, it effectively emphasizes how crucial it is to get started on your investing journey as soon as feasible. That being said, this is hardly a call to charge in with all guns blazing.
A savings account is not risk-free, whereas investing is. The past few months have amply illustrated how volatile the stock market can be, even concerning income stocks—which are often established companies. A path into investing will inevitably include crashes and corrections. Furthermore, by the end of the first timeframe, investors may have far less than they had anticipated.
Also read: Five Benefits Of Dividend Paying Stocks For Our Financial Well-Being
A dividend stock yielding four percent
We are thinking of increasing our shares of Ramsdens shares (LSE: RFX), one dividend stock. Is this a good moment to increase our passive income stream by purchasing a portion of the shares?
Bank and retail services
Ramsdens is a multifaceted company that operates in four main economic sectors. These include selling new and used jewelry, trading in precious metals, exchanging foreign currencies, and providing loans through pawnbrokers.
First, let us examine the share price movement. The shares are trading at 220p at the time of writing. They were trading for 193p at this time last year, a 13% increase over 12 months.
Why and why not?
One of the company’s advantages and a quality we value highly in a dividend stock is its variety. It has some degree of volatility protection because of its four business segments. One profitable segment of the company may balance out a less successful one. In addition, Ramsdens wants to expand the number of stores it operates and modernize its online platform, which is presently improving performance and providing significant value to the company’s earnings.
Second, the current cost-of-living problem is a boon to the pawnbroking and retailing industries. These kinds of enterprises thrive when macroeconomic circumstances put pressure on consumer income.
The most recent profits report from Ramsdens, a half-year trading statement that was made public in June for the six months that concluded on March 31, seems to corroborate what we said above. When compared to the same period the previous year, revenue climbed by about 70%, and pre-tax profit increased by 33%. The company opened nine new facilities and witnessed double-digit growth in performance across all four segments.
Like any dividend stock, the rate of return is what interests us. The 4.3% dividend return offered by Ramsdens is alluring. It increased its interim dividend by 22%, a sign of the health of the company. We are conscious, nevertheless, that dividend payment are never assured.
Tighter regulation in the pawnbroking industry is a scary prospect that might have a detrimental effect on Ramsdens’ operations. Given that pawnbroking is one of its most profitable divisions, a change in legislation could lower its overall rate of return.
Next, because of the current cost-of-living problem, Ramsdens may see a brief uptick in performance similar to what is happening now. It might see a decline in the number of clients using its services if the economy stabilizes. This might make it more difficult for us to generate any passive income.
Final thoughts
We have determined that, if we had the extra money to invest, we would be willing to purchase Ramsdens shares for our holdings after weighing the benefits and drawbacks.
We think that the potential to benefit from the varied product, expanding market presence, and passive income stream is currently too good to pass up. Furthermore, with a price-to-earnings ratio of nine, the shares currently appear to be a decent value for the money. We think Ramsdens might be a fantastic dividend investment for you, giving you steady, reliable yields that will allow you to passively earn £500 every month.