Image source: Getty Images
The average London salary is £37k. This equates to a post-tax amount of £2,377 per month. Assuming that I earn this amount but wanted to try and generate a passive income, a good option I’d consider is investing in dividend stocks. Interestingly, by targeting specific shares I can actually grind out a very respectable amount over time.
Finding the right yield
I’m going to assume that my bills for the month total an even £2,000, leaving me with £377 each month to invest in the market. I’m going to put this to work regularly. One of the benefits of this is that my money can compound quicker this way, rather than if I waited and invested once a year.
I’m going to try and pick dividend stocks that have an above-average dividend yield. The FTSE 100 average yield is currently 3.64%, so this is my benchmark to beat.
I’m trying to squeeze the most out of my money, without being stupid. For example, Vodafone has a dividend yield of 10.9%, one of the highest in the index. Yet this will fall soon, as the next dividend has been cut. The yield will likely fall down to 5.45%.
In terms of a sweet spot whereby I feel the yield is sustainable, I’m targeting a range of between 6% and 7%. This gives me a much larger choice of companies as well. Of course, a strong track record of paying sustainable income doesn’t guarantee it for the future. But it certainly is a good indication that future dividends could be kept up.
Banking on more income
As an example of a stock that’s in this sweet spot, I’d consider buying shares in Investec (LSE:INVP). The FTSE 250 bank currently has a dividend yield of 6.32%. At the same time, the share price has jumped by 19% over the past year.
The banking sector as a whole has benefitted from the rise in interest rates over the past couple of years. This has increased the net interest margin, the difference between the rate charged on loans versus what’s paid out on deposits.
Investec also has a strong corporate division, which it noted has been very engaged and active, helping to drive activity that generates fees for the bank.
This has helped to swell both revenue and profit at Investec. The 2023 results showed the highest revenue figure in over five years. Thanks to a healthy profit, a final dividend of 19p per share was announced, meaning that the annual figure rose by 11.3% versus the previous year.
I think the business has good momentum going forward. A risk is that cuts to interest rates this year could hamper the net interest margin. However, such cuts should help to boost sentiment, potentially helping the corporate division do even better.
Bringing it all together
If I build a portfolio that has an average yield of 6.5% and invest £377 a month, my pot quickly builds. It’s not guaranteed and I could lose money. But after a decade, my portfolio could be worth £64.2k. In the following year, I could make £347 a month just in dividend income.
