3 dividend stocks, 8% yields, and an early retirement plan!

Dividend stocks are well represented within my portfolio. These are companies that reward shareholders with regular, but not guaranteed, dividends.

Most of the time I use these dividends as part of a compound returns strategy — I reinvest my dividends year after year so I earn interest on my interest. But I can also withdraw this money and use it to subsidise my life.

And, in theory, if I have a big enough pot, I could even generate enough money to give up work and retire early. So let’s take a look at how three of my favourite dividend stocks could make that happen.

Generating passive income

If I had £10,000 and I invested in stocks paying an 8% dividend yield, I’d earn just £800 a year in passive income. This is fine, but it’s not a life-changing amount. It’s enough to pay for some dinners out, or a holiday, but it’s not exactly a second income.

So long story short, I’m going to need a bigger pot if I want to generate enough money to retire early. And that’s great if you have it. If I had £1m, I could easily generate £80,000 a year. That would be more than enough to retire on.

Assuming I’m not in Chelsea, I’m going to say I could retire on £30,000 a year. And with 8% yields in mind, that would require me to have £375,000 invested.

Of course, that might sound like a challenge, but it’s achievable with time, regular contributions, reinvestment and the right stocks.

If I started with £10,000 and stocks yielding 8%, I could hit £375,000 in 19 years. This would require me to contribute £400 a month while increasing this contribution by 5% annually throughout those 19 years.

I’d also want to be making these investments within an ISA portfolio. That’s because the dividends I eventually drawdown would be tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The stocks

Of course, there are no guarantees when it comes to investing. But a good investment strategy would be nothing without strong stock picks. So what are they? Well, here are three stocks I own, purely for passive income.

They are Legal & General (8.4% yield), Phoenix Group (9.33%) and Aviva (7.9%, at the time of writing). These three insurance stocks don’t offer much in the way of share-price growth — although by buying now I think there could be some growth — but they’re dividend giants.

These stocks don’t have the best dividend coverage — this ratio indicates the number of times a company can pay its dividends from earnings. But cash generation is strong within the industry, and this provides an additional layer of security to the yield.

Naturally, I hold these as part of a diverse portfolio. And only owning insurance stocks wouldn’t be wise. But, when it comes to dividends, there are a host of dividend big hitters I could be buying now. The above are just some of the favourites I own.