How to invest £15k in dividend stocks to aim for £1,000 in passive income this year
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Do you have a nice amount of money sitting idle in your savings account? You can aim to turn that into instant income by investing in reliable UK dividend stocks. And by making the right decisions, that income stream can grow steadily over time.
Let’s say you have a £15,000 itch to put to good use. What profit can I bring you this year? And what might that grow into decades from now?
Clicking numbers
To calculate the potential return from dividend stocks, we need to make some assumptions about profitability. Fortunately, we can achieve accurate estimates by using standard market estimates.
For example, a portfolio of reliable, high-yield stocks can return between 6% and 8% per year. That means an investment of £15,000 can return £900-£1,200. That’s not a bad start. By reinvesting those profits, the pot will compound slightly, while benefiting from any increase in payouts.
After 10 years, it would reach more than £39,000 (calculating average market growth). During that time, it will pay between £2,340 and £3,120 a year.
But is that a realistic goal? With the right stocks, yes of course.
Why careful stock selection makes a difference
When starting out, investors should consider reliable, well-established dividend payers such as Imperial Brands, British World again The Admiral’s team (LSE: ADM).
Important factors to consider include:
- Income coverage.
- Cash flow.
- Credit management.
- Payment record.
In Admiral’s case, dividend payments account for 81.8% of profits (total dividend is 2.05p, and earnings per share is 2.5p). That’s a lot of earnings going to shareholders. Fortunately, cash flow is helping, including 1.4 times dividends.
However, that alone is not enough – if profits are dipped, it may have to reduce or stop dividend payments. Ideally, it would be better to look for companies with a strong presence.
Sounds good, so is it worth considering?
On the other hand, Admiral has been paying dividends continuously for 22 years without a pause. That shows how committed the company is to keeping shareholders happy.
This is also supported by the company’s very high return on equity (ROE), at 53%. However, the balance sheet appears to be slightly stretched, with current assets lagging behind by a long margin. This may be due to the financial disparity when it comes to insurance but even so, it’s still worth looking into.
Long story short? Admiral looks like a very profitable company that is happy to return a large portion of those profits to shareholders. However, by doing so, it may be stretching its finances a bit, which is dangerous.
An important point
A solid portfolio of highly rated dividend payers can deliver better returns than a regular savings account. But it’s important to weigh the risks against the rewards. Some of the best dividend payers tread a fine line between maintaining performance and keeping shareholders happy.
A solid track record combined with solid earnings and manageable credit is a good combination to look for. In Admiral’s case, I think it is worth considering because he has a proven track record of balancing debt obligations and dividend payments.
