People work hard for the best part of their lives, then hope to benefit from that hard work when they retire. But why just rely on my own work and effort? By investing in dividend shares, I think I can also reap the rewards of millions of other people’s labours.
Here is how I would aim to do that with £300 a month, with the objective of retiring early.
Two exciting things about dividend shares
There are a couple of things specifically I like about owning dividend shares as a way to try and boost the value of my retirement portfolio. The sooner I can do that, the earlier I could choose to stop working.
First, as I mentioned above, they can help me benefit from proven, successful companies. I can buy shares in household names like Apple, Tesco or BP. With large workforces, big customer bases and proven business models, such firms can make sizeable profits. All three pay dividends, so were I a shareholder I could financially benefit directly from that success.
The second thing I like about owning dividend shares is it allows me to build wealth from what is known as compounding. Basically, over time I can use dividends to buy more shares in a company. That then means I ought to be entitled to more dividends in future if the business pays them. With the long-term perspective allowed by retirement planning, this can add up over time.
For example, right now Legal & General offers me a 7.1% yield. If I invested £10,000 in the shares today and took the dividend each year, after 30 years I would hopefully have just over £30,000 in shares and cash. But if I had reinvested the dividends annually instead of keeping them in cash, I should have reached the same portfolio valuation after just 16 years. In other words, in this example I could potentially hit my retirement goal many years early thanks to compounding.
That example presumes a constant share price and dividend. In reality, that may not happen. Both Tesco and BP have reduced their dividends at some point in the past decade, for example. Then again, things might get better not worse. Legal & General has set out plans to increase its payout in coming years, though dividends are never guaranteed.
If I was serious about saving for retirement, I would start putting away a set amount of money on a regular basis. I could drip feed this into shares, buying them on a set frequency. But I think I might be able to bring my retirement forward even more if I wait patiently and invest the money in dividend shares only when they are attractively priced.
The Legal & General dividend yield now is attractive. But the shares are 13% higher than when they traded at their lowest point in the past year. If I had bought then, my yield would not be 7.1% but 8.3%. With the power of compounding, that small difference could have a big long-term impact on my returns.
That is why, although I would put £300 each month into a retirement account, I would not necessarily invest every month. Instead, I would wait for opportunities when dividend shares I already liked offered me excellent value.