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Dividend stocks are well represented in my portfolio. These are stocks that look to reward shareholders by paying them dividends. This is normally quarterly, biannual, or annual.
Companies that pay a dividend tend to be more established. These are rarely growth stocks that have turned to the public markets for funding.
And I like this. I’m investing in established companies, which tend to be less volatile than their younger counterparts, and I’m rewarded with regular, but not guaranteed, dividends.
Investing to stop working
So what if I could invest to stop working? Obviously, we’re aware that the mega-rich can live off their investments, but what about us? Is it possible?
The thing is, it takes time. We need to have a big pot of money to generate the passive income we’re looking for.
Let’s imagine I need £30,000 a year to quit work and live comfortably. I’m going to struggle doing that in London, but this figure is a good starting point.
At the moment, the best yield I believe I can achieve is around 8%. This involves investing in companies with yields that I believe are sustainable over the long term.
The challenge is that I’d need £375,000 to invest in stocks paying an 8% yield to achieve £30,000 a year in passive income.
That may sound daunting, but as other articles on compound returns demonstrate, reinvesting and regular contributions can turn a small pot into a very big one, over time.
In this case, if I practiced a compound returns strategy, starting with £10,000 and stocks yielding 8%, it’d take me 19 years to reach £375,000, if I contributed a further £400 a month and increased this contribution by 5% annually.
It’s naturally worth noting that after 19 years, my portfolio would be growing exponentially, if I could leave it longer, the gains would be impressive. But I’m also aware that my investments could disappoint as returns aren’t guaranteed.
The stocks for the job
There are many UK-listed stocks offering sizeable dividends. But today, I’m picking just three to help me hit that 8% dividend returns target. These are Legal & General (8.5% yield), Phoenix Group (9.15%) and Vistry Group (7.3%).
Some of the best yields right now come from the two sectors these three companies operate in, insurance and housebuilding. Insurance companies, including Aviva, offer sizeable yields, but not much in the way of share price growth.
Meanwhile, yields among housebuilding stocks have soared as the share prices tanked from mid-2022. Vistry is my top pick. While the sector is seeing broad improvements in the private market, Vistry has a affordable housing business that provides resilience against private market troubles.
And with share prices falling this week across the board following hot inflation data, it could be a great time to buy and lock in some sizeable yields.
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