Got a decent lump sum of cash sitting idle in your savings account? You could aim to turn that into immediate passive income by investing in reliable UK dividend stocks. And by making the right choices, that income flow could steadily grow much bigger down the line.
Suppose you’ve got £15,000 just itching to be put to good use. What dividend income could it deliver for you this year? And what might that grow to become in decades from now?
Crunching the numbers
To calculate potential returns from dividend shares, we need to make some assumptions regarding yield. Fortunately, we can achieve relatively accurate estimates by using typical market averages.
For example, a portfolio of dependable, high-yielding dividend shares could return between 6% and 8% a year. That means an investment of £15,000 could return £900-£1,200. That’s not a bad start. By reinvesting those dividends, the pot would compound steadily, while also benefiting from any increase in payouts.
After 10 years, it could have reached over £39,000 (accounting for average market growth). At that point, it would payout between £2,340 and £3,120 a year.
But is that a realistic goal? With the right stocks, yes it is.
Why careful stock-picking makes a difference
When starting out, investors should consider reliable, well-established dividend-payers such as Imperial Brands, British Land and Admiral Group (LSE: ADM).
The key factors to consider include:
- Earnings coverage.
- Cash flow.
- Debt manageability.
- Payment track record.
In Admiral’s case, dividend payments take up 81.8% of earnings (the full dividend is 2.05p, while earnings per share is 2.5p). That’s a lot of earnings being spent on shareholders. Fortunately, cash flow helps, covering dividends 1.4 times.
Still, that’s only barely sufficient — if profits dipped, it might have to cut or suspend dividend payments. Ideally, it would be better to look for companies with stronger coverage.
Sounds good, so is it worth considering?
On the plus side, Admiral’s been paying dividends consistently for 22 years without a pause. That shows just how dedicated the company is to keep shareholders happy.
This is further supported by the company’s exceptionally high return on equity (ROE), at 53%. However, the balance sheet looks a little stretched, with current assets lagging liabilities by a long margin. This may be due to accounting discrepancies when it comes to insurance but still, it’s worth keeping an eye on.
Long story short? Admiral looks like a highly profitable company that’s happy to return much of those profits to shareholders. However, by doing so, it may be stretching its finances a bit, which is risky.
The bottom line
A solid portfolio of highly-established dividend-payers can deliver far better returns than a standard savings account. But it’s important to weigh up the risks versus the rewards. Some of the best dividend payers push a fine line between maintaining operations and keeping shareholders happy.
A solid track record combined with strong earnings and manageable debt is the ideal combo to look for. In Admiral’s case, I think it’s worth considering because it has a proven history of balancing debt obligations with dividend payouts.
