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Income stocks are well represented in my portfolio. Essentially, these reward their shareholders with regular, but not guaranteed, dividend payments.
By investing in these income stocks, I can either use the dividends to fund my life, or I can reinvest them.
The latter option allows me to benefit from something called compound returns. This is essentially the process of earning interest on my interest.
So let’s see how it works out and which stocks I would pick.
Essentially, the compound return strategy is like a snowball effect. The longer I leave it, the more money I have in the end.
So if I start with £5,000 and invest in shares with a high paying, yet achievable 7% dividend yield, after 20 years I’ll have £20,000. After 35 years I will have £57,000.
I can increase this last figure by drip-feeding cache over time, which makes a big difference.
If I were to add £150 a month for 35 years, I would end up with £327,000. If I increase my monthly contribution by 5% per annum, I’ll have £560,000 after 35 years.
That’s the power of compounding and drip-feeding.
It is important to note that the above calculation does not allow for any share price gains. But it is also important to note that profit is not guaranteed and I can lose money as well as make it.
I don’t want to put all my eggs in one basket. But with £5,000 to invest, I’d split it no more than three ways. This is because if I spread myself too widely I may struggle with stock research and development.
So which three stocks would I pick? Well, they need an average 7% dividend yield for my above calculations to work.
My first pick, and one I recently bought, is the big dividend payer. Phoenix Group Holdings, This insurance, savings and retirement business offers a solid 7.7% yield and has a dividend coverage ratio of nearly 1.7.
The current negative economic backdrop has proved challenging for some of Phoenix’s peers, but the firm is expected to deliver incremental, organic new business cash generation of £1.2 billion in 2022. The stock has 13 years of consistent payouts and consistent dividend growth — a big plus.
next i will buy Sociedad Quimica y Minera de Chile, It’s a growing lithium miner with a 7.9% dividend yield. Analysts suggest the dividend is well covered.
Of course, the stock is particularly dependent on lithium revenue, and that could be viewed as a risk. However, the metal is a key component of the renewables revolution. I don’t see demand slowing down anytime soon. So I recently bought Sociedad Quimica y Minera de Chile.
Finally, I’m lifting Greencoat UK Wind Another recent purchase of mine. The Renewable Energy Trust aims to grow its dividend in line with inflation year after year. Currently, the stock offers a 5% yield, which is fine since my other two picks offer yields closer to 8%. Next year, there are plans to increase the dividend payment by 13% to 8.76p per share. The dividend cover for 2022 was 3.2x, so growth appears cheap.
The obvious concern is that the wind can be temperamental. So until there is battery technology to deal with the issues of supply and demand, wind can be an unreliable energy source.
Post 3 Income Stocks To Try To Turn £5,000 Into £560k! First appeared in The Motley Fool UK.
James Fox owns Greencoat UK Wind plc, Phoenix Group Holdings plc and Sociedad Quimica y Minera de Chile. The Motley Fool UK recommends Greencoat UK Wind plc. The views expressed on the companies mentioned in this article are those of the author 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 wide variety of insights makes us better investors.
Motley Fool UK 2023