3 dividend stocks to try and turn £10,000 into £1.2m!

Dividend stocks are well represented in my portfolio. These stocks provide income on a regular basis, often every month or two.

However, dividends are not guaranteed. Companies can cut or stop dividends without warning – so they pay attention to the sustainability of the results.

I can use this dividend payment to finance my life in the near term, or reinvest it.

So let’s take a closer look at my picks.

Invest now, or later?

If I were to invest £10,000 in a high-paying, but achievable, 7% yield, this year I could expect to receive £700 in dividends. This is a reasonable return and may be enough to help finance my life. Maybe you can pay for dinner out every month, or help me with the bills.

However, if I don’t need the money now, I can reinvest it. This allows me to benefit from something called generating compounds. This means the process of gaining interest in my interest.

So if I invest £10,000 in shares that pay 7% a year, and reinvest the dividends every year, after ten years, I will have £20,000. If I were to stop reinvesting dividends at this point, I could generate £1,400 a year in passive income.

However, the real results come when I leave money for longer, and when I contribute regularly. So, if I follow the same strategy for 35 years, invest £320 a month, and increase my monthly contribution by 5% every year, at the end of the period I will have £1.2m.

This is a huge potential profit and highlights the importance of investing regularly and for the long term rather than looking for quick wins.

Choose wisely

Of course, this strategy only works if I pick my stocks well. With £10,000, I would probably split the money three ways. That’s because I like to do research, and I can struggle to keep up with all the developments if I pick 10 stocks, for example.

The first pick will be Next Solar Energy. As the name suggests, this is a solar-focused trust, which currently offers a dividend yield of 6.5%. The portfolio includes 99 solar assets – the majority in the UK.

It is forecast to pay 7.52p and 8.36p in 2023 and 2024, respectively, up from 7.17p this year. That is clearly positive. However, the forward coverage is between 1.3-1.5. It’s fine, but I’m more comfortable with both. Despite this, I bought this stock this month.

Phoenix Group Holdings is an insurance, savings and retirement business that offers a 7.7% yield and has a dividend coverage ratio of around 1.7. That’s a little firm. It is not a business that is likely to offer me much in the way of price growth, but for the purposes of the compound yield strategy, I think it is a great purchase. I recently bought this stock.

My final choice is Close Sibling Group. It’s a FTSE 250 The company provides securities trading, credit, deposit-taking and wealth-management services.

The year ahead could be challenging for lenders with forecasts of slow growth for the loan book and significant costs for Novitas’ legal finance business. However, I am attracted by its long-term prospects, its low price (P/E of nine) and its yield of 6.5%.