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I think UK stocks are a good source of income because they pay higher dividends than their US counterparts.
Average profit margin in FTSE 100 it is 3.5%. In fact, several well-established UK companies offer yields of up to 10%. In the most popular index in the US, i S&P 500it is only 1.32%.
By investing through a Stocks and Dividends ISA, UK residents can reduce their tax liability. This type of ISA allows investments of up to £20,000 per year with no capital gains tax charged on returns.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
That's just the beginning, though
The secret to successful investing isn't always about making big bets or timing the market correctly. Sometimes, the most powerful strategy is to simply start small and stay consistent.
Even if I only have £100 a month, I can harness the incredible power of compound interest by investing in dividend paying stocks and reinvesting dividends. Over time, these small donations can add up to a large nest egg.
Balancing risk and reward
I have been building my income portfolio for a long time. It includes high yield dividend stocks, growth stocks, and defensive assets to keep things stable during market volatility.
Trading means my average yield isn't as high as it could be but my risk score is much lower. Since my long-term strategy spans several decades, I need to be ready for anything.
It calculates returns
Consider a portfolio of 12 stocks, eight of which have yields between 6% and 10%. Even if the others are low or zero, it will return an average yield of about 6%.
Since it is focused on income, price growth will be lower than average, at around 5% per year.
By investing £100 a month, that portfolio can grow to £23,000 in 11 years. By then, the annual share payment will be around £1,200 – the same as my annual contributions. I can then stop contributing and let it grow on its own.
After another 10 years, the compounded returns would have increased the pot to around £66,000, paying annual dividends of around £3,650. Another decade later and I'll be ready to retire, with a pot of around £200,000, paying annual benefits of £12,000.
That would be a decent addition to my pension, considering I only had to contribute £100 a month for the first 10 years. Remember, 30 years is a long time. Many things can change, so the final price could be much less… or more.
A stock to consider
One of the first stocks I added to my portfolio was HSBC (LSE: HSBA). As the largest bank in the UK, I feel it is a safe investment. This company produces a dividend of 7.1 %.
Banks are not particularly defensive but HSBC tends to be volatile. The price was hit hard during the crisis of 2008 and again during the Covid. This is also reflected in its dividend payments, which were reduced in 2008 and 2009, and again in 2019 and 2020.
But during strong economic times, payments have been reliable, often increasing year after year. From 2020, the annual dividend has quadrupled from 15c to 61c per share. No wonder why I think it makes a great addition to my portfolio!
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