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Recent surveys reveal the average UK adult has just over £16k in savings. This varies hugely depending on age, location, and even gender, but I think we’d all agree we’d like to have more stashed away, even if it’s just for rainy-day purposes. Income stocks can offer a way to boost savings, with a concise strategy available to be copied.
Benefits of building a portfolio
The strategy’s based on owning a broad enough set of stocks that pay out regular dividends, so that each month, money is coming in. For the first few years, the income would be reinvested. This helps speed up reaching the goal of hitting £10k a year in passive income.
The broad portfolio also reduces risk. If the investor owned only one stock and it ran into difficulties down the line, all of the dividend potential could be at risk. Yet if a dozen or more companies are owned, even if one cuts the dividend, the overall yield isn’t massively damaged.
The target yield of the portfolio is essential, as it dictates how long it takes to reach the end goal. Everyone’s risk tolerance is different. Low-risk investors might want to focus on options around the FTSE 100 and FTSE 250 averages in the low 3% range. High-risk investors might push for a dividend yield of 10%. I think it’s reasonable to assume a target yield of 6%.
Talking numbers
In theory, let’s say someone invested £500 a month with this target yield. The portfolio would need to be worth £166.7k. This could be hit during year 14, meaning the investor might not have to invest anymore beyond this point and be able to save the £10k annually.
It’s plausible to do this, but I do have to caveat things by explaining that planning this far in the future isn’t perfect. There are so many factors that could change the goalposts over the next decade, potentially making this take longer than planned.
Shaking hands with the government
One example of a company that could be considered for this project is the International Public Partnerships (LSE:INPP). As the name suggests, it’s an infrastructure investment trust that focuses on public, government-backed projects.
Over the past year, the stock’s up by 4%, with a current dividend yield of 6.83%. This makes it a good fit for the style of income stock for the portfolio.
To be clear, the business doesn’t build infrastructure. Rather, it owns equity stakes in existing operational assets. Governments or public bodies make regular payments, which I think makes the dividend fairly stable. After all, these types of clients are unlikely to go bust!
I’d say the dividend’s sustainable because a lot of the contracts tied to the assets are long-term (we’re talking decades). Therefore, the income payments are typically fully covered by operating cash flow. As a result, the management team isn’t reliant on asset sales to pay income. The current dvidiend cover is 1.5x, so I don’t see any stress here.
In terms of risks, it’s exposed to any changes in political policy. If the government decides to cut budget spending or looks to shift to another provider, it could be painful financially. Yet even with this, I think it’s a stock for investors to consider.
