The British have long been known as tea drinkers. However, it’s estimated that nearly four in five adults in the UK regularly drink coffee — myself included. But what would happen if I gave up my morning dose of caffeine on the way to work and invested the savings into high-yield dividend stocks instead?
A potentially worthy sacrifice
Like most items, the price of a morning coffee has shot up in recent months. In fact, I can nowadays expect to pay upwards of £6.75 for a large cup of coffee with whipped cream and chocolate sprinkles on top.
Speaking personally, however, I like my hot beverages without bells and whistles. So let’s say I only pay £5 for a large cup each weekday.
If I were to forgo that daily £5 coffee five times a week, I could save just over £100 a month. That’s £1,300 a year that could be channelled into UK dividend shares.
So, instead of paying to drink coffee, I’d essentially be getting paid not to consume it.
Turning coffee into cash with FTSE 100 shares
Now, such a modest sum doesn’t sound like much, but it’s important to recognise that compounding lies at the heart of regular investing.
From 1984 to 2022, the annualised total return of the FTSE 100 was 7.5%. There’s no guarantee that it will produce the same return over the next four decades or so, but I’m going to assume it does for the purpose of this article.
After five years of putting £1,300 into stocks and reinvesting the dividends, my portfolio would have grown to around £7,550. While that isn’t exactly life-changing, it’s not bad for simply redirecting my daily coffee funds into the stock market.
The good news is that after 10 years of investing in FTSE 100 shares, my portfolio would have increased in value to approximately £18,391.
If I now wanted to start enjoying my morning cappuccino again, I could switch to receiving passive income instead. Then, if my income shares were yielding just 5.5%, I would be banking a little over £1,000 a year in dividends.
However, this 5.5% figure is actually quite conservative. Dividend-paying firms such as housebuilder Persimmon, telecoms giant Vodafone and Anglo-Swiss miner Glencore regularly trade with even higher yields.
I should point out that all of these companies have been known to cancel or reduce their dividends in recent years. So it would be important for me to build a diversified portfolio across many sectors.
Why stop there?
If I let compounding do its thing for another decade, my portfolio would reach £56,295 at the 20-year mark. Settling for the same 5.5% average dividend yield at this point would lead to passive income of almost £4,000.
But if I kept going for a further 10 years, the results would be quite amazing. At this point, according to a compound interest calculator, I would have accumulated over £134,419. That sort of money could provide a very nice boost to my pension pot.
Alternatively, that 5.5% dividend yield could unlock an impressive £7,393 in annual passive income. All for giving up a single £5 cup of coffee each weekday!
This example demonstrates the power of making small but consistent investments over time.