Income stocks form the core part of my portfolio. They tend to be less risky investment than growth stocks as they, by virtue of the fact they’re established companies, are usually profitable. Income stocks provide me with regular, albeit not guaranteed, dividend payments.
Right now is certainly an interesting time to be investing in income stocks. That’s because dividend yields, on the whole, are getting larger. But today, I’m looking at investing for the long run, and how I can turn a £30,000 deposit and £750 a month into £1m.
Compound returns
My strategy for generating £1m via income stocks is based around the miracle of compound returns. This is the practice of investing in stocks paying a dividend and earning interest on my interest. The longer I leave it, the more money I have, as returns grow exponentially over time.
So, if I start with £30,000 and invest it in income stocks with 5% yields for 10 years, while continually reinvesting my dividend, at the end of the decade I’ll have £50,000. That’s clearly not bad. But what if I invest for longer, say 35 years?
Well, after 35 years, I’d have an impressive £172,000. That’s the power of reinvesting dividends but it’s clearly not the promised £1m.
Ok, so if I added £750 a month, for 35 years, I could get there. I appreciate that’s not a small figure, but I know it’ll be worth it in the end. After 35 years of adding £750 to the pot, I’d have generated £1.07m through the compound returns strategy.
Maybe you’re thinking £1m might not be a lot of money in 35 years. Well, it’s worth remembering that the stock market has a general upward trend. In fact, the FTSE 100 — the UK’s most value 100 companies — is almost five times larger today than it was in 1987.
It’s not an easy calculation, but I’d hope to see my investment benefit from the general upward trend in stock values. In fact, factoring in stock growth — using a very rough calculation — that £1.07 could be worth around £3.5m.
Of course, that might not happen and I have to accept that my investments might not pay off. Stocks I buy could go down as well as up.
Why I’d start now
I’m already heavily invested. But, if I could put £30,000 into a new ‘compound returns fund’ for myself, I think now would be a good time to start. That’s because dividend yields are seriously inflated right now. In fact, many stocks are offering yields close to 10%.
It’s important to remember that the yield at the time I buy the stock is the yield I’ll continue to get — unless the dividend payment changes — regardless of fluctuations in the share price. This is why I’m on the lookout for blue-chip stocks with juicy yields to add to my portfolio now.
Right now, Legal & General is offering a 7.8% yield, while Direct Line‘s yield is over 11%. These are truly sizeable yields. I’ve recently added the latter to my portfolio.
