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How much would I have to invest in dividend shares for an income of £250 per week?

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Collecting a second income from dividend shares seems like a great idea to me. But how much would I need to invest to generate a useful amount of income — say, £250 per week?

Here, I’ll look at two options and provide an example portfolio of dividend shares I’d consider buying today.

Before I start, I should point out that dividend shares won’t provide a weekly income. Most dividends are paid twice a year, so I’d have to manage these payouts myself to provide a weekly income.

Quick, simple and easy

The easiest safest option, in my view, would be for me to put all of my capital into a FTSE 100 index tracker fund.

Investing in a tracker fund would mean that I’d have limited risk of being affected by problems at a single company. However, I would have quite heavy exposure to sectors such as mining and banking, which have a big weighting in the lead index.

The average forecast dividend yield of FTSE 100 stocks is about 3.9% at the moment. To generate an income of £250 per week — equivalent to £13,000 per year — I’d need about £335,000.

A higher yield from dividend shares

A 3.9% yield doesn’t seem too bad to me. But I’m pretty sure I could do much better by investing directly in a smaller number of dividend shares.

This approach would leave me with more concentrated exposure to fewer companies, which could be a risk. On the other hand, picking stocks means I’d be able to avoid companies I don’t want to own. That would leave me free to focus on the stocks I think offer the best dividends.

I’d plan to build portfolio of 20 stocks. In my experience, this number provides a good balance between diversification and focus. It’s also low enough to be manageable — I’d need to keep track of these companies’ performances myself.

Which FTSE 100 stocks would I buy?

I’ve built a quick example portfolio of FTSE 100 dividend shares I’m familiar with and would be happy to buy today.

These shares have an average forecast dividend yield of 5.5%. This payout is expected to be covered twice by forecast earnings, on average. I’m comfortable with that, as I think it should provide a decent margin of safety.

Company Forecast dividend yield
Barratt Developments 9.3%
Phoenix Group 8.4%
Vodafone 7.3%
British American Tobacco 7.0%
NatWest Group 6.7%
Landsec 6.5%
DS Smith 6.3%
Admiral 6.3%
BT Group 5.8%
National Grid 5.3%
WPP 5.1%
Schroders 4.8%
Tesco 4.8%
BP 4.7%
DCC 4.2%
CRH 4.0%
Unilever 3.7%
BAE Systems 3.4%
Coca-Cola HBC 3.4%
AstraZeneca 2.7%
Average yield 5.5%

I’d want to do more in-depth research on these companies before hitting the ‘buy’ button. But in my view, these are all good quality names with solid long-term prospects.

If I built a portfolio from these 20 stocks, I estimate I’d need £236,363. That’s around £97,000 less than than I’d need if I put all my capital into a FTSE 100 tracker.

Of course, dividends are never guaranteed and aren’t a replacement for cash savings. But I’d definitely be happy to take this approach to generating a regular income from dividend shares.

The post How much would I have to invest in dividend shares for an income of £250 per week? appeared first on The Motley Fool UK.

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Roland Head has positions in British American Tobacco, DCC, DS Smith, NatWest Group, and Unilever. The Motley Fool UK has recommended Admiral Group, British American Tobacco, DS Smith, Landsec, Schroders (Non-Voting), Tesco, Unilever, and Vodafone. 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.