How I’m using dividend stocks to try and turn £2k into £4k

Jon Smith explains how he’s aiming to double his money by using dividend stocks to reap passive income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Woman using laptop and working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend stocks provide me with a conventional way of generating income from my investments. By owning a certain stock, I’m eligible to receive a cut of earnings that are distributed as dividends. I can then decide to reinvest that money back in the stock, or enjoy spending it. With my aim of trying to turn my £2k investment into £4k, I’m following these steps.

Setting my timings

To begin with, I need to set myself a timeframe to achieve this goal. Naturally, I want this to be as soon as possible, but there are some obvious constraints. For example, there isn’t a dividend stock that has a yield of 100%. If there was, I could invest my £2k, receive a dividend of £2k within the next year and pat myself on the back.

Currently, the average FTSE 100 dividend yield is 3.64%. So using the assumption that I invest my money to achieve this blended yield, it’ll take me multiple years to reach my goal. It’ll take me 19 years to be specific.

Fortunately, I can tweak a few things in order to speed up the process, which I’ll get to in a minute. But the main point here is having a realistic expectation that good things do take time!

Ramping up my potential

One easy way that I can speed up my process of reaching £4k is to invest more money at some point in the future. For example, if there’s a dividend stock I own that increases the dividend per share next year, I could invest more. In this way, I’ll have a bigger stake in the company, meaning my dividend payment will be higher.

However, this wouldn’t mean that I’ve turned £2k into £4k. If I invest another £1k, then I’ll only be turning £3k into £4k.

So my other option is to increase the dividend yield that I target for top dividend stocks. I can find options in the FTSE 100 and FTSE 250 with yields in the 8%-11% range. It’s not just one or two companies either, so I can build a portfolio of several stocks while achieving this yield.

If I target a 9% yield, the timeframe for reaching my goal reduces significantly. In eight years, I’ll be able to have an investment pot of £4k, after reinvesting all my dividends along the way.

Points to remember

Investing in dividend stocks can be lucrative. The above example would mean that I’d easily outstrip the interest I could earn from leaving my money in a Cash ISA. However, it does come with higher risks.

Dividend stocks don’t offer me guaranteed income. It all depends on how the business performs in years to come. If it has a bad year, no dividend may be paid at all. Further, my investment fluctuates with the share price. If it falls, I have to take this into account when totaling my overall profit or loss.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith and the Motley Fool UK have 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »