
U have a sum of money u wish to invest to start earning dividends, u would like to achieve a yield of 7% as u know this compounded, doubles yours income in ten years.
Let’s use 10k, all other amounts pro rata and u want to invest your money for four years as u learn more about re-investing dividends. U would like to start your journey cautiously as it’s your hard earned. U could take no risk and invest it all in a Government gilt but u will not achieve a return of 7%.
Your funds are inside a tax wrapper so u want a gilt that pays interest (coupon) to re-invest into a higher yielder. U choose to buy:
ISINGB0002404191TIDMTR28 ExchangeLSE Par Value£100Maturity Date7/12/2028 Coupons per year 2 Next coupon date7/6/24 | Coupon6%Income Yield5.58%Gross redemption yield 4.18% Accrued interest 277.05p Dirty Price£110.23 |
When u buy u have to pay the seller the interest accrued to date, note that the price u have to pay is above the £100 that will be returned at the end of 2028 because of the market beating interest rate.
The next dividend (coupon) payment is 7th June, so u will not have to wait long for some cash to re-invest. The yield u will receive if u wait until the maturity date is 4.18%, u do not have to do anything, the cash will appear in your account.
You want a Trust that yields 10% to add to your 4% and would like the opportunity for a capital gain so u buy NESF (other Trusts are available so DYOR) trading at a discount to NAV of 30%. The 10% is not guaranteed, unlike your gilt, so u have to be comfortable that the dividend is repeatable before u buy.
The blended yield is 14%, so u have achieved your goal, hopefully nothing to do for the next 4 years but to decide where to re-invest your £700 a year.
NESF has just gone xd so u will have to wait for your first dividend but normally if u buy after the xd date u get more shares for your money and a higher yield.
A journey of a thousand miles begins with a single step” is a Chinese proverb that originates from the Tao te Ching12. The quotation is from Chapter 64 of the Dao De Jing ascribed to Laozi, although it is also erroneously ascribed to his contemporary Confucius. The meaning of this saying is that even the most difficult and longest ventures have a specific starting point. Similarly, it implies that daunting tasks can typically be begun by doing something very simple.
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