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I’m on the lookout for investments that could earn me some long-term income. And that means high-yield stocks.
Right now, I’m seeing some tasty FTSE 100 dividends. And the ones I most like are from financial stocks.
That’s right, I’m talking about today’s most hammered stock market sector. And at a time when our economic outlook appears dire.
Economic ills
The International Monetary Fund (IMF) reckons the UK economy is set to show the weakest growth in the G7 this year. And I’ve even seen claims that interest rates could stay around 5% for the next five years.
That might not be good for lending, for mortgages, or for banks. Well, higher interest means better lending margins. But that’s no good if nobody wants to borrow anything.
But what was it that famed investor Sir John Templeton said?
Buy when others are selling…
It takes patience, discipline and courage to follow the contrarian route to investment success. To buy when others are despondently selling, to sell when others are avidly buying
Sir John Templeton
Sir John was described by Money magazine as “the greatest stock picker of the century“. So maybe buying at what he called a time of maximum pessimism could help make me rich?
Which financial stocks?
How much might I be able to earn from half a £20k Stocks and Shares ISA allowance stashed in high-yield financial stocks?
I’m going to pick my top two banks, top two insurers, and an investment manager, and see how my income could build up from them.
So that’s Barclays, with a 4.9% dividend yield, and Lloyds Banking Group on 5.8%.
Then I’ll pick Aviva, with its 7.8% yield, and Legal & General at 8.8%.
And finally, let’s add asset manager M&G, on a whopping yield of 10.2%.
How much income?
Now these are all forecasts, so there are definitely no guarantees here. Dividends could rise and fall in the coming years, hopefully with an overall upward trend.
And share prices will almost certainly rise and fall. But, taking today’s figures as a snapshot, splitting £10k equally between these five stocks should get me an overall dividend yield of 7.5%.
Long-term returns
That’s not going to get me very much in year one. But I invest for the long term, with a 20-year horizon.
So if I can put the same £10k into the same shares, and buy new shares with my dividends, each year? Well, at 7.5% a year, in 20 years my pot could grow into a stunning £450k. And an annual 7.5% on that could earn me a very nice £2,800 a month in passive income.
Final thoughts…
Is this realistic? Well, if these dividends remained this high, I’d expect share prices to rise. That means I’d buy fewer new shares each year, and yields should drop.
And if the dividends are cut, I’d expect share prices to fall. So reality might not paint as pretty a picture as this.
I’d never put all my ISA money in one sector anyway, and would always want good diversification.
But I think this shows the potential long term value we could unlock by buying shares when they’re cheap and dividend yields are high.
