Who wouldn’t like a 50% return on investment? At such high interest, I could watch passive income roll into my account every month without having to do anything.
If I had £1,000 to spare, I’d like to earn £500 over a year. Such a high return wouldn’t happen straight away, but many investors seek this kind of payout.
One of the best ways to achieve this is to take a lesson from the Dividend Aristocrats. This type of company teaches one of my favourite lessons about investing – especially when targeting big dividends.
Dividend Aristocrats
To be clear, no stock pays out 50% a year. Any CEOs confident enough in cash flows to pay a regular 50% dividend would find themselves in charge of the most popular stocks on the planet.
A deluge of investors would send the share prices shooting up and the yields would come down quickly.
Even a 20% dividend is a stretch. Special dividends or buybacks sometimes bump payouts close to that amount, but still some way short of turning £1k into a yearly £500.
The secret is to find wealth-building income shares. These shares can take a small stake and multiply the amount over time, often ending up with massive dividend payments. This is where Dividend Aristocrats shine.
In short, a Dividend Aristocrat is any stock to increase dividends for 25 years running. Paying out more each year is a strong sign of a well-run company with management planning ahead and investing capital well.
Big targets
Even from quality stocks like this, I might receive only a modest dividend in the first year. My cash return won’t be anywhere near 50%, but I could target much higher earning power.
First, I can reinvest the return so I own more shares. On top of that, I’d expect the following year’s dividend to increase too.
Together, I hope to watch the value of my shares and the income I receive grow exponentially until I earn seriously impressive dividends.
The data backs up the earning power of these kinds of stocks too. A report from AJ Bell studied FTSE 100 returns between 2007 and 2017.
Firms with a 10 years or more streak of increases beat the rest of the market by nearly three times.
Not far away
By harnessing the power of dividend-increasing stocks, I can work towards my passive income goal of taking my starting stake and receiving 50% in dividends.
That said, there are no guarantees here. I can lose money with any kind of stock.
To go back to that report, AJ Bell calculated an average 12.6% yearly return from these stocks. If I could achieve an above-average return like that then my 50% goal wouldn’t look too far away.
In fact, £1,000 invested at that rate earns over £500 in the 13th year. While that’s hardly fast, it’s all the evidence I need to see the importance of finding quality dividend-increasing stocks.
The post £1,000 to spare? Here’s how I’d aim to turn it into a yearly £500 passive income appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
