£7k in this dividend stock could generate an investor £119 in passive income every 4 weeks

Passive income can be derived from a variety of investment ideas. However, one of the most popular ways is via buying dividend shares.

Although some stocks only pay out cash on an annual or semi-annual basis, there are some options that provide monthly payments. As a result, the accumulation and compounding benefit of this can swiftly boost an investor’s portfolio.

Details of the business

One example of a company with regular income is the TwentyFour Select Monthly Income Fund (LSE:SMIF). The stock’s up 6.6% over the past year, and has a dividend yield of 8.46%. As the name suggests, the dividends get paid monthly.

Before we dive into more details about the income, let’s understand more about what the fund does. As part of investor information, it aims to “take advantage of the premium returns available from less liquid instruments across the debt spectrum“.

In easier-to-understand terms, it buys corporate bonds, asset-backed securities and other similar products. In return for buying these types of loans and debt, it gets paid a return as interest. Given that it focuses on slightly more risky types of debt, it gets paid a premium rate of interest.

This is good for an income investor, as the yield’s well above the average for the FTSE 100 and FTSE 250. It’s also reassuring that the share price had gained over the past year. Sometimes, a high yield’s only elevated because the share price is falling. This isn’t sustainable for income in the future.

Noting risky assets

Of course, with a yield this high, there are risks involved. The main one comes from the potential for loan defaults from the portfolio. As the fund buys risky assets, the higher rate of interest compensates for the higher potential for a company not paying back the debt. The latest market update from January flagged up higher volatility in asset prices due to President Trump. This potentially poses issues going forward which need to be managed carefully.

Fortunately, defaults haven’t been large in the history of the fund from the information I can see. Yet it only takes a couple of companies to have serious financial problems to have a negative impact on the fund, and therefore the share price.

Income potential

If an investor put £7k in the stock today, they’d stand to get paid some cash fairly imminently. Yet if this income was reinvested, it could allow the overall investment to compound faster. Even without putting anymore fresh capital in, after a decade, the value of the investment could be worth £16,263. In theory, the following year this would equate to a monthly payment of £119.17.

Granted, planning this far out is difficult. These are just assumptions and forecasts that can change. But the benefit of an investor including a monthly income stock can be high, and therefore worthy of consideration.

The post £7k in this dividend stock could generate an investor £119 in passive income every 4 weeks appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.