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Earlier this week, the FTSE 100 fell into correction territory, having dropped more than 10% from its peak back towards the end of February. A stock market correction might raise alarm bells for some, but it doesn’t always mean bad news. In fact, it can be used as a good entry point for income hunters.
Taking advantage of higher yields
To understand why a market correction can help dividend investors, let’s consider an oversimplified view of its impact on a portfolio. Let’s say a portfolio currently has an average dividend yield of 6%. The market then falls by 10%. If the investor then went and bought all their stocks again, the average yield could be 6.6%. This assumes that all the stocks in the portfolio have fallen the same amount as the index, and that the dividend per share hasn’t changed in the past month.
Of course, this doesn’t work out perfectly in reality, but the principles are correct. So if someone was looking to get started in building a passive income, the move in the market could provide an attractive entry point. This is because the average dividend yield will have increased in recent weeks.
To build this into a £10k annual cash flow, patience would be needed. If someone was able to buy a diversified group of stocks with an average yield of 6.6% with £600 a month, the portfolio could quickly grow. By reinvesting the proceeds whenever a dividend was paid, the compounding impact would further speed up the process. By year 14, the pot would be generating over £10k in annual passive income.
There are risks involved. Even though I think a portfolio with this average yield is realistic, it’s higher risk than buying stocks around the index average yield of 3.17%. Furthermore, companies can reduce or increase the dividend each year, making it hard to forecast far in the future.
A strong track record
One company that could be considered for inclusion in the portfolio is the International Public Partnerships (LSE:INPP). The stock is up 18% in the past year, with a current dividend yield of 6.62%.
It isn’t a typical company in the sense of selling products or services. Instead, it’s an investment trust that owns stakes in essential infrastructure assets (things like schools and hospitals) across the UK, Europe, and beyond. These assets are usually backed by long-term government or public-sector contracts. This means they generate predictable, inflation-linked cash flows over the long term.
The nature of the business, therefore, makes it appealing for income investors. Beyond that, the track record speaks for itself. The company has increased its dividend for 18 consecutive years! Past performance doesn’t guartentee future returns. But it does give a very good indication that the dividend could keep increasing in the future.
It’s true that there’s political and regulatory risk, given many of the assets depend on government contracts. This needs to be managed carefully to avoid an over-reliance on one client.
Overall, I think it’s a stock to consider that could form part of a diversified portfolio that can be started with the recent market correction.
This story originally appeared on Motley Fool
