Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'

Man writing ‘now’ having crossed out ‘later’, ‘tomorrow’ and ‘next week’© Provided by The Motley Fool

By Jon Smith

Things to start ticking off

The first step is seeing how much I can allocate to dividend shares right now. A lump sum of £1,000 or more would be great to kick off with. At the same time, I want to run my numbers and set a realistic figure of how much I can invest each month going forward. This will help me to build up my portfolio to a level where it generates income each month.

Once I’ve got my figures sorted, I need to decide where to actually invest the money. There are three main elements to this.

To begin with, I need to pick stocks that have an above-average dividend yield. the higher the yield, the higher the risk associated with the dividend payments. So I have to pick a risk level that I’m happy with.

Another element is the fundamental business operations. Is the company growing? Does it operate in a sector that has a bright future?

From zero to hero

The theory is great, but let’s now put it into practice. Let’s say I have my £1,000 initial investment ready to go and have picked GlencoreAnglo AmericanBT Group and HSBC as four stocks that I like.

By putting £250 in each, I’ll have a blended average dividend yield of 5.95%. Next month, I’ll endeavour to invest an additional £100 in each stock (£400 total). After a few months, I can mix it up and include some different shares. Ideally, I’d like to get the portfolio to a dozen or more stocks.

From the beginning, I know that if I can keep my average yield at 5.95%, I need to get to a pot size of just under £202k. This will ensure £1,000 of monthly second income from that point onwards.

Using that calculation, it’ll take me 21 years to reach the target. This will change from person to person based on how much someone can invest and how high a yield that can be achieved. Yet from a standing start of zero, it’s an impressive feat.

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Remember in your Accumulation stage if a Trust u own falls in price, as long as the dividend is ‘secure,’ u get more shares from your dividend re-investment.

A win win plan. GL