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Reaching the £10,000 mark is a key milestone for many savers. It's a huge achievement, but having a sizeable nest egg brings with it dilemmas. Getting the most out of your investment is an important consideration. After all, it's possible to turn this sum into a substantial passive income stream with smart investments.
Cash savings accounts have their advantages. They are much less volatile than dividend-paying stocks. However, the potential returns from the stock market can be considerably higher. Investors willing to take the risks could be handsomely rewarded.
Here's how you'd reach almost £500 in monthly passive income with a dividend portfolio and an extra £10,000 to invest.
Keep up the good work
Building a five-figure nest egg takes dedication. It's a good starting point, but it's also worth maintaining those savings practices.
I would start by investing the lump sum of £10,000, but I would also set aside additional sums from my salary each month to invest. That way, I would maximise my chances of achieving my passive income goals.
My stock prices can fall. By investing through the economic cycle, I buy in good times and bad, hoping to pick up good deals along the way.
Dividend investing
I use several metrics to evaluate whether I would like to buy a particular dividend-paying stock. These include dividend yield, distribution history, dividend coverage, valuation, and stock price growth potential.
To illustrate this in practice, one FTSE 250 Index One action I think is worth considering is Pets at Home Group (LSE:PETS). Britain is a nation of pet lovers and this retailer is a major player in the market.
The company's product portfolio includes toys, accessories, bedding and medicines for our furry friends. It also offers services ranging from veterinary care to grooming.
For starters, the yield looks attractive. At 4.2%, it exceeds the average for Treasury bonds. FTSE 100 Index and FTSE 250. In addition, an ongoing £25 million share buyback programme adds value for shareholders.
The company's dividend history is also attractive. Payouts have grown significantly since 2015 and investors have earned regular passive income for the past nine years.
Dividend coverage is respectable at 1.6 times earnings. Admittedly, this is lower than the two times ratio, which indicates a wide margin of safety. However, it is above a ratio of 1.5. Below this threshold is where I would generally have serious concerns.
As for valuation, a forward price-to-earnings (P/E) ratio of 13.8 also seems reasonable. So far, so good.
One red flag for me is the growth potential. A Competition and Markets Authority (CMA) investigation into the veterinary industry is damaging to investor confidence. That said, the group’s recent trading update showed solid revenue growth in the first quarter, but regulatory risks should not be overlooked.
Overall, I think there is a strong investment case for these dividend stocks.
Compound returns
By investing in a diversified mix of stocks like Pets at Home, you could generate £499 in monthly passive income in just over 25 years with modest contributions.
Assuming my portfolio grew by 7% per year and earned a 5% return on all my investments, I would reach my target by investing £10,000 plus an additional £83 per month.
Dividends are not guaranteed, so it is not a risk-free venture. However, it does not take a fortune to earn a healthy passive income if everything goes according to plan.
