3 income stocks to try and turn £5,000 into £560k!

Income stocks are well represented in my portfolio. Essentially, it rewards shareholders with regular, but not guaranteed, dividend payments.

By investing in these income stocks, I can use the dividends to finance my life, or I can reinvest them.

The last option allows me to benefit from the so-called compound yield. This means the process of gaining interest in my interest.

So let’s see how it works and which stocks I would pick.

Mega-bali

Essentially, the strategy produces a compound like snowball effect. The longer I leave, the more money I make in the end.

So if I were to start with £5,000 and invest in shares that pay 7% dividend yield which is quite large, but doable, after 20 years I would have £20,000. After 35 years I have £57,000.

I can increase this final figure by drip-feeding cash over time, which makes a huge difference.

If I add £150 a month for 35 years, I end up with £327,000. If I increase my monthly contributions by 5% a year, I will have £560,000 after 35 years.

That’s the power of compounding and drip-feeding.

Please note that the above calculation does not allow for share price gains. But it is also important to note that the results are not guaranteed and I can lose money as well.

Stock options

I don’t want to put all my eggs in one basket. But with £5,000 to invest, I wouldn’t split it more than three ways. That’s because I might struggle to keep up with stock research and developments if I’m too spread out.

So what three stocks would I pick? Well, they need to have an average dividend yield of 7% for my calculations above to work.

My first pick, and a recent buy, is a big dividend payer Phoenix Group Holdings. This insurance, savings and pensions business yields a solid 7.7% and has a dividend coverage ratio of around 1.7.

The current negative economic background has proved a challenge for some Phoenix friends, but the company expects to generate £1.2bn from incremental, organic new business cash generation by 2022. The stock has 13 consecutive years of payouts and consistent dividend growth – a big plus. .

Next time I will buy it Chemical and Mining Society of Chile. It is a growing lithium miner with a dividend yield of 7.9%. Analysts recommend a good closing dividend.

Of course, the stock depends primarily on lithium profits, and that could be risky. However, metals are a core component of the renewable energy revolution. I don’t see demand falling in the short term. That’s why I recently bought Sociedad Química y Minera de Chile.

Finally, I chose Greencoat UK Wind – another new purchase from mine. The renewable energy trust aims to increase its dividend in line with inflation each year. Currently, the stock offers a yield of 5%, which is good because the other two options offer yields close to 8%. Next year, the next dividend payment is 13% to 8.76p per share. A 3.2x dividend cover for 2022, so the increase looks affordable.

The obvious concern is that the wind can be temperamental. So until battery technology comes along to solve the supply and demand problem, wind can be an unreliable source of energy.