UK income stocks: a serious long-term wealth creator?

Every week, FTSE 100 income stocks pay out well over a billion pounds on average to shareholders as dividends.

That is just the FTSE 100. Lots of smaller British companies also pay out hefty amounts in dividends.

So, could someone aim to build serious wealth over the long term simply by investing in carefully chosen UK income stocks?

I think the answer is yes, for three main reasons.

A trio of wealth creation levers

The first reason is the benefit of long-term regular investment.

Even with relatively modest amounts, drip feeding money into an investment over the long term can mean things soon add up.

A second factor is how much the dividends can add on top of the money invested. Dividends are never guaranteed, but they can be substantial.

If they last, then someone who buys one share in a company today could potentially be earning dividends from it for decades – perhaps as long as they live, if they hang onto it.

A third factor is what is known as compounding.  That means dividends being reinvested and so in turn earning more dividends.

Billionaire Warren Buffett compares an income stock compounding to pushing a snowball downhill. As it rolls, the snowball gets exponentially larger because snow picks up more snow and so on. In the stock market, that snow can be dividend income!

It all adds up – sometimes to a lot!

As an example, say someone starts with nothing today then invests £500 a month and compounds their portfolio at 5% a month.

5% is well above the current FTSE 100 yield of 2.9%, but there are plenty of blue-chip UK income stocks that offer a yield of 5% or higher.

In that illustration, at the end of the 35-year period, the portfolio should be worth over £554,000.

So the investor would be over half way to becoming a millionaire, on the back of investing £500 a month.

One dividend share to consider

I mentioned above that there are plenty of UK income stocks yielding over 5%. One is Lucky Strike manufacturer British American Tobacco (LSE: BATS).

The FTSE 100 share yields 5.4%. It also has a track record of annual increases in its dividend per share, stretching back decades.

Management aims to keep the annual dividend growth coming. But cigarette sales volumes are declining and look set to keep doing so. That could hurt profits and the company’s ability to fund its costly dividend.

Still, although cigarette sales volumes are falling, British American can raise prices to help mitigate the impact on profits.

It has also been expanding its produce lineup in recent years, trying to build up more non-cigarette sales. That could help it keep generating sizeable cash flows in future.

Some investors shun tobacco stocks for ethical reasons, regardless of their income potential. But, for those who do not, I see British American as a share to consider.

The post UK income stocks: a serious long-term wealth creator? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

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