Heaps of companies have cancelled, cut, or suspended their dividends this year. However, even during these extremely difficult times, many other companies have continued to reward their shareholders with cash distributions. Here, I’ll discuss how to identify the best UK dividend stocks, and exactly why they can help you get rich and retire early.
Identifying the best UK dividend stocks
Buying shares in a company makes you a part-owner of the business. If the company increases its sales, profits, and dividends over time, the business — and your ‘share’ of it — will become increasingly valuable.
Therefore, in seeking to identify the best UK dividend stocks, it makes sense to begin with the business. Does it have a long history of producing increasing sales and profits, supporting a rising dividend?
Such a profile suggests it may be operating in an industry, or sub-segment of an industry, with structural growth drivers. And/or that it has some competitive advantage over its rivals. For example, it may own powerful brands or valuable intellectual property. High margins and a high return on equity relative to peers tend to confirm a competitive advantage.
Can you envisage the business maintaining its strong position in the coming years and decades? In other words, can it continue to deliver the same increasing sales and profits, supporting a rising dividend, as it has in the past?
Successfully identifying such businesses is to successfully identify the best UK dividend stocks. And investing in them puts you firmly on the road to getting rich and retiring early!
Compounding makes the best UK dividend stocks even better
Albert Einstein understood a thing or two about the world. He once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”
Dividends compound when you reinvest them — that’s to say, use them to buy more shares in the company. The long-term compounding value of dividends is more powerful than many investors realise.
Wealth manager Sanlam offers a good demonstration of dividend compounding, using the example of The Coca-Cola Company. Over the period 1980-2017, if you’d bought $3,500 of shares at the outset, the value of your investment would have grown to $220,000. You’d also have received dividends of about $80,000.
If you’d reinvested those dividends, your investment would be worth a staggering $580,000.
The eighth wonder of the world, as Einstein put it. Or, as my Motley Fool colleague Harvey Jones wrote in a recent article on his strategy of reinvesting dividends: “They’re the tiny acorns that can grow into mighty oaks.”
Get started!
Given the miracle of compounding dividends, it’s a good idea to start investing as early as possible. Even relatively small sums can snowball into significant wealth over multiple decades.
As such, focusing on the best UK dividend stocks, and regularly reinvesting the dividends, could help you get rich — and retire earlier than you would otherwise be able to do.
However, it’s never too late to start investing and benefitting from compounding dividends. Indeed, this year’s market crash could be an opportunity for older investors to make up lost ground.