Your investing journey has to begin somewhere. For those of us who aren’t trust fund babies, we need to start with more modest sums. Putting $1,000 into the market at the beginning simply means it will take us longer to achieve our goals. It doesn’t mean we don’t invest in the stock market for annual passive income.
You will still be surprised by how much you can earn in annual income over time by buying dividend stocks. Furthermore, you don’t have to go chasing yield, which could be dangerous. The highest-yielding stocks are often the riskiest and research shows that dividend stocks with high yields—but not the highest—outperform all other stocks.
Yet even stocks with relatively low yields can generate significant returns if you use the magic of time and compounding. Allowing your money to grow over the years while reinvesting dividends back into the portfolio is how you create wealth.
Below are three stellar passive income stocks to start building your retirement nest egg. Just remember, we’re only starting out with $1,000 and not adding anything else to it ever. In the real world you should be regularly putting new money to work in your portfolio. So let’s see how dividend stocks can start you on your journey to financial independence.
NRG Energy (NRG)
Utility operator NRG Energy (NYSE:NRG) is an all-of-the-above outfit when it comes to energy generation. It offers natural gas, coal, oil, nuclear, wind, solar and utility-scale power generation. While utilities are typically thought of as sleepy investments valuable for their dividend payments, NRG gives investors a bit of excitement.
NRG stock has a 10-year annual growth rate of 8.4% while hiking its payout by nearly 12% annually over the past decade. The dividend currently yields 2.7%. If we assume 8% price appreciation and 10% annual increases, a $1,000 initial investment gets you a little over $26 in dividends in that first year. You won’t be retiring off that but as we’ll see, sprinkling the pixie dust of time and the power of compounding, NRG Energy will grow into a cash-producing machine.
By reinvesting the dividends, after 10 years NRG will be paying over $537 a year. Again, nice but not time to think of retiring. After 20 years, though, the utility is paying $537 per year or almost $37 a month. By year 30, we are now making $115 a month on average or almost $10,000 a year. What’s more, our portfolio has now grown to be worth more than $29,600.
| NRG Energy (NRG) | |||
| | Avg Monthly Dividend | Annual Dividend Income | Portfolio Value |
| Year 1 | $2.51 | $26.27 | $1,100.21 |
| Year 10 | $7.83 | $536.77 | $2,903.24 |
| Year 20 | $28.96 | $2,475.40 | $8,946.20 |
| Year 30 | $115.08 | $9,961.66 | $29,611.36 |
Remember, all we did was put $1,000 into the stock and then forgot about it. We let the power of time and compounding do the work for us. The dividends are now paying us well over what our initial investment every year and coupled with NRG stock’s price appreciation our $1,000 has grown nearly 30 times in value.
Domino’s (DPZ)
Pizza shop Domino’s (NYSE:DPZ) is a sleeper stock, quietly growing both shares and dividends at around 20% a year. It has a total return of more than 520% for the past decade compared to a 229% return for the S&P 500.
At $445 per share, DPZ stock is not cheap but it has earned its premium by building out its business. It adopted a “fortressing” strategy that swarms an area with multiple locations which gives its brand incredible mind share. While each individual store may do less business the overall effect is to raise revenue companywide.
Here’s what your $1,000 grubstake gets you if we assume just 12% stock price growth and 12% hikes in the dividend over the years.
| Domino’s (DPZ) | |||
| Avg Monthly Dividend | Annual Dividend Income | Portfolio Value | |
| Year 1 | $1.51 | $15.73 | $1,125.96 |
| Year 10 | $4.89 | $330.76 | $3,648.00 |
| Year 20 | $17.83 | $1,537.85 | $13,307.90 |
| Year 30 | $65.05 | $5,939.01 | $48,547.22 |
Even though dividend growth was lower, capital appreciation in DPZ stock helped the total portfolio value soar. And we’re also making over $5,900 in annual income!
NXP Semiconductors (NXPI)
Arguably best known for its near-field communications chips, NXP Semiconductors (NASDAQ:NXPI) has been a phenomenal investment. Its semiconductors are being used to develop the next generation of smart cars that can talk to one another and their surroundings. Because cars are really rolling computers these days, the chipmaker has enjoyed 16.5% annual returns over the past 10 years. It only started paying a dividend in 2018 but has been raising the payout at a better than 26% annual rate.
If we invest our $1,000 into NXPI stock, and assume 10% capital appreciation and just 15% dividend growth, we’ve got the makings of a passive income winner. Check out the table below.
| NXPI Semiconductors (NXPI) | |||
| Avg Monthly Dividend | Annual Dividend Income | Portfolio Value | |
| Year 1 | $1.55 | $15.95 | $1,107.88 |
| Year 10 | $6.64 | $396.98 | $3,177.31 |
| Year 20 | $36.79 | $2,501.10 | $11,307.95 |
| Year 30 | $243.25 | $15,495.80 | $48,023.60 |
Now we’re making more than $15,000 a year in annual passive income and the portfolio has increased nearly 50 time in 30 years. All from a $1,000 investment.
Ultimately, the exact numbers don’t matter. What you see is it’s not magic, but simply giving your portfolio the time to mature. Just think of the amount your portfolio can grow to if you continuously add money to it and invest in top passive annual income stocks like these.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.