If I had a £50k pot, where would be the best place to put it to work? Well, one option to build wealth and maybe even retire early is to invest in a high-yield portfolio. This kind of portfolio means I invest in dividend stocks — companies that pay out money to shareholders with their profits.
This is a popular option for a lot of UK investors. No wonder, as the FTSE 100 is filled with firms that put a priority on their dividends. Here are a few of the top Footsie yields at the moment:
| Dividend yield | |
|---|---|
| Vodafone | 10.76% |
| M&G | 9.99% |
| Phoenix | 9.46% |
| British American Tobacco | 9.08% |
| Legal & General | 8.51% |
| Taylor Wimpey | 8.12% |
| Aviva | 8.10% |
Each dividend stock like those above would pay me a dividend probably once or twice a year. Across the whole portfolio, I’d expect a steady trickle of small payments from all the stocks. This would be ‘passive’ income.
Stocks that don’t pay dividends can be more volatile. With such shares, I’d be looking at the ups and downs of a chart to see if I’ve made money via the share price itself, and I’d only get something back once I sell. They can still offer good returns, but it’s a type of investing that puts some people off.
In terms of which dividend stocks I’d add to my portfolio, I’d look for a couple of things. First, a payment that has gone up year after year. Second, I’d look to avoid firms with a history of missing a year or two.
Dividend Aristocrats
A company with a track record of increasing dividends is the holy grail for a high-yield portfolio. One that has done it for 25 years in a row is sometimes called a ‘Dividend Aristocrat’.
So how much could I make from such stocks? Well, I think I’d target a 6% yield. For context, the FTSE 100 average return over decades is 7.2%, although that includes stock price growth as well.
In the first year, I’d get £3k in dividend payments from my £50k. So it’s nice to see me getting some passive income straight away. And because these are cash payments, they end up in my account under ‘settled cash’. I can withdraw them straight away, no selling needed.
Also, as I’m investing in more stable dividend stocks, I’m more likely to keep my original sum intact. This means I may still have the money to call on in an emergency or for a rainy day fund.
Special things
I must say that keeping the original £50k is by no means a sure thing. Yes, dividend stocks tend to be safer and more stable than other stocks, but they can still lose value the same as any other company can. This is a risk with any type of investing in the stock market and shows the need to think long term.
If I do have a longer time horizon though, special things can happen. If I take my earnings and reinvest them, a £50k sum at 6% turns into around £287k over 30 years. If I drip-feed some extra savings from my job intot he pot, that amount could be even higher, giving me a second income source and even the chance to retire early.
