Dividend stocks are well represented within my portfolio. These are companies that reward shareholders with regular, but not guaranteed, dividends.
Most of the time I use these dividends as part of a compound returns strategy — I reinvest my dividends year after year so I earn interest on my interest. But I can also withdraw this money and use it to subsidise my life.
And, in theory, if I have a big enough pot, I could even generate enough money to give up work and retire early. So let’s take a look at how three of my favourite dividend stocks could make that happen.
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Generating passive income
If I had £10,000 and I invested in stocks paying an 8% dividend yield, I’d earn just £800 a year in passive income. This is fine, but it’s not a life-changing amount. It’s enough to pay for some dinners out, or a holiday, but it’s not exactly a second income.
So long story short, I’m going to need a bigger pot if I want to generate enough money to retire early. And that’s great if you have it. If I had £1m, I could easily generate £80,000 a year. That would be more than enough to retire on.
Assuming I’m not in Chelsea, I’m going to say I could retire on £30,000 a year. And with 8% yields in mind, that would require me to have £375,000 invested.
Of course, that might sound like a challenge, but it’s achievable with time, regular contributions, reinvestment and the right stocks.
If I started with £10,000 and stocks yielding 8%, I could hit £375,000 in 19 years. This would require me to contribute £400 a month while increasing this contribution by 5% annually throughout those 19 years.
I’d also want to be making these investments within an ISA portfolio. That’s because the dividends I eventually drawdown would be tax-free.
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The stocks
Of course, there are no guarantees when it comes to investing. But a good investment strategy would be nothing without strong stock picks. So what are they? Well, here are three stocks I own, purely for passive income.
They are Legal & General (8.4% yield), Phoenix Group (9.33%) and Aviva (7.9%, at the time of writing). These three insurance stocks don’t offer much in the way of share-price growth — although by buying now I think there could be some growth — but they’re dividend giants.
These stocks don’t have the best dividend coverage — this ratio indicates the number of times a company can pay its dividends from earnings. But cash generation is strong within the industry, and this provides an additional layer of security to the yield.
Naturally, I hold these as part of a diverse portfolio. And only owning insurance stocks wouldn’t be wise. But, when it comes to dividends, there are a host of dividend big hitters I could be buying now. The above are just some of the favourites I own.
