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Generating income is a goal that many British investors share. From retirees to young investors, many people want to generate some income from their investments.
Although I’m not looking for an income yet (I’m in the growth phase of investing), I often think about how to build it it is safe income stream if I wanted cash flow, which is what most investors follow. With that in mind, here’s a look at how I think they should invest £20k to get cash in 2025.
Direct to ISA
My first suggestion would be to put that money into a Stocks and Shares ISA. The reason I do this is that any income generated in the account can be tax free.
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.
Spreading my money
Next, I think investors should look to spread their money over a range of dividend stocks. This provides shareholders with regular cash payments from the company’s profits.
Assuming they had no more income shares, they should look at putting £20k into 10 to 15 different stocks. If they owned this many stocks and the couple underperformed they would probably still do well.
Focusing on the company’s fundamentals
In terms of how to pick stocks, I would look at a few things.
First, I would suggest looking at companies with long-term growth potential. Another thing I have learned is that if you invest in a company with poor prospects, it usually ends up in tears, even if the dividend is good at the beginning.
Next, focus on companies with high dividend coverage ratios. This ratio measures a company’s earnings per share compared to its dividends per share and can indicate how safe a company’s dividend payout is.
Generally, a ratio of more than two is great, while a ratio of more than 1.5 is acceptable. If the ratio is close to or less than one, it’s a red flag.
I would also suggest looking for companies with strong balance sheets. If the company is full of debt, it can lead to a cut in the budget because interest payments always take precedence over dividend payments.
Finally, I would avoid stocks with very high dividend yields (9%+). Usually, a high yield is a warning sign that something is wrong and a profit cut ahead.
I would focus on stocks that yield between 4% and 7%. These yields are usually safe rather than incredibly high quality.
A high income stock?
One stock that meets these criteria today is the pharma giant GSK (LSE: GSK). As a pharmaceutical and vaccine engineer, I think it has great potential in a world where the population is growing and aging.
And the income on offer looks attractive – the yield is less than 5%.
Meanwhile, the supply of shares is healthy. By 2025, earnings per share are expected to be 155p, which easily covers a forecast dividend payout of 60p (earnings cover ratio of 2.6).
As for the balance sheet, it looks reasonable. Granted, there was a total debt of £12.8bn at 30 September, but I think this is manageable.
Of course, this stock has its risks. Another consideration is the appointment of RFK Jr as US health secretary (he is a known vaccine skeptic).
Overall, I think GSK has the potential to play revenue. For anyone looking for money, I think it’s worth considering.
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