One of the reasons a lot of people do not retire early even though they want to is because they feel they do not have enough money to do so. I think that if I could boost the income streams I had heading towards retirement, I could bring the date forward – perhaps by years.
Here is how I could try to do that.
Investing in dividend shares
If I invest £300 a month in shares with an average dividend yield of 5%, how much would I have after 30 years?
If I take the dividends out as they are paid, I will basically be left with the capital I put in — £108,000. But if I keep reinvesting the dividends, something known as compounding, then after 30 years my portfolio would be worth almost £250,000. At that point I should be earning annual dividend income of roughly £12,500.
Higher yield
But what if my dividend yield was 8%, not 5%? In that case, compounding ought to mean that after just 25 years my investment portfolio would be worth around £285,300. The annual dividend income would be roughly £22,800.
In other words, if I earned an 8% rather than 5% yield, and did nothing else differently, I could hopefully earn an extra £10,000 a year, five years sooner. That might let me retire early — with extra income!
Real life
That example makes a couple of presumptions, specifically that the share prices and dividend yields remain constant.
In reality, over two to three decades, that is unlikely. They could go down. Then again, they may increase – letting me move my retirement forward even more.
Either way, I think the example illustrates two important things. One is how compounding dividends can make a big difference to long-term investing results. The second is that just a few percentage points more on the average yield of my portfolio could help me retire early.
Buying shares to help me retire early
So, do I invest in shares that yield 8%, not 5%?
My answer is that do not invest on the basis of yield alone. Knowing a dividend yield tells me nothing about the health of the underlying business. That is important because for a company to keep paying dividends its business will need to do well.
I would instead do what I always do. First I would hunt for companies with attractive business characteristics I think should help them make profits in future.
Quality on sale
If I found such shares, I would then consider whether I could buy them at an attractive price.
So in this example, there may actually be no difference between the company yielding 8% and the one yielding 5%. They could actually be the same company, just purchased at different share prices. If I buy when the share price falls, I will get a higher dividend yield from the same company than if I had bought before.
That is why I have a shortlist of what I think are great companies I would like to buy at the right price, such as Diageo and Judges Scientific. That way, the next time their prices crash, I will be ready to scoop up shares for a lower price than before. Hopefully, that could help me retire early — with a bigger retirement income!