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.
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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.
