How I’m using dividend stocks to try and turn £2k into £4k

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Dividend stocks provide me with a conventional way of generating income from my investments. By owning a certain stock, I’m eligible to receive a cut of earnings that are distributed as dividends. I can then decide to reinvest that money back in the stock, or enjoy spending it. With my aim of trying to turn my £2k investment into £4k, I’m following these steps.

Setting my timings

To begin with, I need to set myself a timeframe to achieve this goal. Naturally, I want this to be as soon as possible, but there are some obvious constraints. For example, there isn’t a dividend stock that has a yield of 100%. If there was, I could invest my £2k, receive a dividend of £2k within the next year and pat myself on the back.

Currently, the average FTSE 100 dividend yield is 3.64%. So using the assumption that I invest my money to achieve this blended yield, it’ll take me multiple years to reach my goal. It’ll take me 19 years to be specific.

Fortunately, I can tweak a few things in order to speed up the process, which I’ll get to in a minute. But the main point here is having a realistic expectation that good things do take time!

Ramping up my potential

One easy way that I can speed up my process of reaching £4k is to invest more money at some point in the future. For example, if there’s a dividend stock I own that increases the dividend per share next year, I could invest more. In this way, I’ll have a bigger stake in the company, meaning my dividend payment will be higher.

However, this wouldn’t mean that I’ve turned £2k into £4k. If I invest another £1k, then I’ll only be turning £3k into £4k.

So my other option is to increase the dividend yield that I target for top dividend stocks. I can find options in the FTSE 100 and FTSE 250 with yields in the 8%-11% range. It’s not just one or two companies either, so I can build a portfolio of several stocks while achieving this yield.

If I target a 9% yield, the timeframe for reaching my goal reduces significantly. In eight years, I’ll be able to have an investment pot of £4k, after reinvesting all my dividends along the way.

Points to remember

Investing in dividend stocks can be lucrative. The above example would mean that I’d easily outstrip the interest I could earn from leaving my money in a Cash ISA. However, it does come with higher risks.

Dividend stocks don’t offer me guaranteed income. It all depends on how the business performs in years to come. If it has a bad year, no dividend may be paid at all. Further, my investment fluctuates with the share price. If it falls, I have to take this into account when totaling my overall profit or loss.

The post How I’m using dividend stocks to try and turn £2k into £4k appeared first on The Motley Fool UK.

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Jon Smith and the Motley Fool UK have no position in any of the shares mentioned. 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.