Dividend shares are well represented in my portfolio. In fact, for every one growth stock, I’ve around eight or nine dividend stocks. In short, I prefer the security of investing in established companies which have a track record of rewarding shareholders.
Many novice investors think they need to invest in growth stocks if they want to achieve strong total returns. But that’s not the case. Let’s take a look at how three of my favourite dividend shares can help me turn £5,000 into £50,000!
Compound returns
Well, it’s going to need a compound returns strategy. Compounding is a powerful concept and it involves investing in dividend stocks and earning interest on my interest, in addition to the original investment.
Essentially, the compound returns strategy is very much like a snowball effect. And the longer I leave it rolling on, the more money I’ll have in the end. So if I invest my £5,000 in stocks paying an 8% dividend yield, and reinvest my returns over 29 years, I’ll have £50,000.
But it’s worth highlighting that I could possibly reach £50,000 quicker by contributing regularly. Such regular contributions are an important part of an investment strategy — they add up over time and it can help us moderate market fluctuations. I also have to point out that my gains might be slower if the stocks I pick underperform.
Picking wisely
The reason I’ve picked an 8% yield is because that’s roughly the highest yield I think can be achieved without sacrificing the sustainability of the dividend. So while I’m looking for big yields, I’m also looking for sustainable ones.
One way of identifying a sustainable yield is the dividend coverage ratio (DCR). A DCR tells us how many times a company can pay its stated income from its earnings. Normally a DCR above two is considered healthy, but it’s also worth considering firms with lower DCRs but with solid cash generation.
Top picks
There are a handful of companies in the UK that I could invest in to help me achieve an 8% yield. But I can also look at stocks listed overseas.
One such stock is Chilean lithium miner Sociedad Química y Minera de Chile SA. The miner has seen some downward pressure after plans were announced for greater state control over the lithium mining sector in Chile.
However, it could be a stock worth considering. To start with, it still has seven years left on its contract in Chile’s northern desert. It’s also offering a huge 15% dividend at the current price.
But I’d be inclined to pick less risky stocks, including Phoenix Group and Legal & General. These two financial services firms offer 8.8% and 8.4% dividend yields, respectively.
They’re certainly not the most interesting companies on the FTSE, and historically haven’t offered much in the way of share price growth. But I’d argue, at their current depressed states, now could be a great time to buy to achieve share price growth on top of the sizeable dividends. That’s why I’ve bought them both.
I also like UK housebuilder Vistry. It’s affordable housing, or ‘partnerships’, side of business provides resilience, and the dividend yield currently sits at 7.3%. Despite concern for the private sales market, things appear to be improving.
