£9,000 in savings? Here’s how investors can try to turn that into £1,430 a month in income

The best way I’ve found to generate income (money made from a small job) is dividends.

Picking the right high quality stocks that pay high yields is the only real effort required for this. After that, all that is needed is to monitor the progress of the shares and so on.

Such stocks will continue to pay dividends regardless of what else I may do, including sleep. And as famous investor Warren Buffett puts it: “If you don’t find a way to make money while you sleep, you will work until you die.”

Stock selection

Ultimately, it is the company’s profit growth that will increase the dividend (and the share price). So, this is the main quality I look for in a stock that is meant to generate high income.

Another aspect I want is that the share can be underestimated in two areas. This reduces the likelihood that the incoming profit will be wiped out by the loss of the share price if the stock is sold.

So, first of all I want the shares to look equal to the value of the comparable shares. Second, against where the stock’s value should be, based on the company’s future cash flow projections.

Ultimately, of course, I want a big harvest. This will generate a lot of income in the short term and if reinvested wisely can lead to stellar long term returns.

Good case on point

FTSE 100 global investment manager IM&G (LSE: MNG) is a good example of this selection process, in my opinion, and is worth considering.

Analysts predict that revenue will grow by 30.1% each year until the end of 2027. The danger in this in the long run is the intense competition in this sector.

However, the stock looks very undervalued compared to its competitors in both price-to-book (P/B) and price-to-sales (P/S) ratios. For both, it trades at just 1.3 versus a peer average of 3.6. And finally, it’s at 0.7 compared to a peer average of 4.3.

A discounted cash flow analysis shows that the shares are considered 59% undervalued at their current price of £1.99. Therefore, the fair value would be £4.85, although the vagaries of the market could push it lower or higher.

And finally, it yields 9.9% now. However, analysts predict that this will rise to 10.4% in 2025, 10.8% in 2026, and 11.6% in 2027.

How much income can I make?

I started with £9,000 holdings in M&G and investors on the same assumption would make £891 in dividends in the first year.

Given an average yield of 9.9%, this would rise to £8,910 after 10 years and £26,730 after 30 years. But none of this is guaranteed, of course.

The downside, however, is that if these dividends are used to buy more M&G shares – known as ‘dividend compounding’ – the returns can be much greater.

Using this traditional investment method at an average yield of 9.9% would produce £15,123 in dividends after 10 years, not £8,910. And after 30 years on the same basis, it would be £164,303 rather than £26,730!

Added to the initial investment of £9,000, the total cost of the M&G would be £173,303. This will pay out £17,157 a year in dividends at that time, or £1,430 each month!

Inflation will reduce the purchasing power of this income over time. However, it emphasizes that a very small initial investment in a positive income stock can bring big returns in the long run.