3 magnificent dividend shares to try to turn £5k into £50k!

Dr James Fox details three dividend shares he’d use to try and turn a £5k investment into a sizeable nest egg worth £50k. So how can this be possible?

| More on:

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.

Concept of two young professional men looking at a screen in a technological data centre

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 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.

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.

James Fox has positions in Legal & General Group Plc, Phoenix Group Holdings, Sociedad Química Y Minera De Chile and Vistry Group Plc. The Motley Fool UK has 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

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »