how to accumulate dividend stocks at cost of a cappuccino

Couple days ago I found an article on dividend stocks. The article talks about how you can try to make money in the current environment with some dividend stocks in your portfolio. If you are interested in the article you can read it here. There are some specific stocks that the authors suggest looking into.

With the current cost of living crisis and high inflation it is extremely important to look for ways to offset these. The last thing you want is to be losing buying power at nearly 10% per annum. You can learn more about inflation and what it does to your buying power here.

An idea that I had – what does a return on investment of the value of a takeaway coffee looks like. I tried to do some number crunching and present the results below. So continue reading if you are interested in this.

This also links with the following – I’m a strong believer that everyone needs to have passive income streams. Dividend stocks can be a great starting point for someone to build a passive income stream without needing to do much. Isn’t it a dream to have money coming into your bank account while you’re sleeping?

what are dividend stocks?

Not all company shares are identical. Some are known as growth stocks which rarely offer any dividends. The key thing with these is the value growth that they offer you. Other stocks however, often from more established companies, at times offer a dividend payment to the person holding its stock.

One thing to keep in mind – dividend terms and payments can change. There are some companies however that have maintained their dividend payments and actually kept growing these for over 20 or 30 years. If you are looking to build yourself a passive income from dividend payments – these types of companies are the ones to consider.

The dividends vary from 0% to as much as 15% (I haven’t seen higher dividends than that). There is however a big watch out – companies that offer too big of a dividend often are not able to maintain it in the long run. This would mean that the value of your stocks might dramatically fall once the company changes its dividend policy.

Companies that offer dividends in the range between 2% and 7% in my view are more sustainable long-term investments. While you aren’t getting the biggest dividends out there, you can be more confident that this can continue for many years to come. I would encourage you to do your research into the history of these dividends as well.

If you start researching companies there is actually a metric called dividend cover. It measures how much of companies profit is being paid out to shareholders. This allows you to quickly understand if company can maintain its dividend policy.

One other thing to keep in mind – some companies are currently benefiting through high inflation. Mining or oil companies are a great example of it. All of the materials they extract are currently traded at inflated prices. This results in them being able to pay out high dividend yield. This is also covered by the profits the companies are making.

The watch out in my view is the future price of these goods once the inflation starts backing off. If the raw material prices start dropping the profits of mining/oil companies will drop dramatically as well. This would mean that they are no longer able to pay the high dividend you received previously. As a result, new potential investors will value their stocks at a lot lower price which could result in you losing a lot of your initial capital.

are dividend stocks the only way to get passive income?

I know that not everyone is comfortable picking their own stocks. There are some good news if that is you – you can actually invest in an index fund that pays your dividends as well.

One of the options I would consider here is FTSE 100 – it is well known for its high dividend yield. FTSE 100 has a lot of defensive companies in it. These companies offer very little value growth historically. What they do offer on the other side – great dividend payouts.

The current yield sits at roughly 4%. It is a strong yield for an index. There is one more thing you can do if 4% doesn’t fully satisfy your needs.

You can split your investments into two. First half would be invested into FTSE 100. This gives you a fairly defensive half to your portfolio and a solid dividend return. There is also less likelihood of your investment loosing values.

The other half of your investment can be divided into couple dividend paying company stocks. You can pick and mix whatever tickles your fancy. Make sure you are picking quality shares. By doing the above you could reach circa 5-6% dividend return.

Do keep in mind though, that any investment can both fall and rise in its value!

how much dividends I can actually get at a takeaway coffee cost?

So now, I’m getting to the fun bit. I want to have a look into how much dividends can you make from an investment the value of a takeaway cappuccino. I’m obviously not talking about a one-off investment here.

What I am assuming here is that instead of buying a takeaway coffee every day you would put that money into your investment account. For that I took £3.50 per day value. This is just over £100 a month. If this is something you do – consider what is the most cost effective way of investing. You don’t want to invest every day as fees might end up costing a fortune. Once a month or even a quarter might be a better strategy here.

If I am to assume a 5% dividend yield. With the above in mind the results would be following. After one year of investing your portfolio would be worth just under £1,300. This would pay you roughly £64 per year in dividends.

This isn’t crazy amount of money however it can become a great start to your passive income journey. Next I’ve actually assumed that you would take the dividend and invest it back into the market – buy yourself more dividend stocks.

If you continue doing that for five years the results would become a lot more exciting. After five years of investing £3.50 per day and reinvesting all your dividends you would be sitting on a portfolio of just over £7,000. This would give you roughly £353 per year in dividends.

You have to keep in mind that at any point you can also sell your portfolio and use the money for other needs. It’s an investment account that pays you better returns than most banks currently do.

In the table below I’ve summarised the £3.50 investment per day scenario as well as had a look into what the numbers would look like if you were to invest let’s say £100 per week. 

After five years you would have an investment worth nearly £29,000. This would pay you over £1,400 in dividends per year. That’s definitely way more exciting figure.

The table above does not include any gains that you could benefit from with stock value going up. Neither I included any potential fees you might need to pay. If you were confident enough to assume further 4-5% stock value appreciation – this combined would offset the current inflation rate we are seeing in the market.

summary

You can see above how little investments can really add up over time. Not only it allows you to partially cover the current inflation cost but also build you a passive income stream for your future.

There is no minimum to how much you need to invest. The more you are able to afford, obviously, the higher the returns you’re likely to get.

It is amazing to think that a takeaway coffee once per day can add up to over £7,000 in five years time. Not only that, but it could also pay you back some dividends.