The retirement age for State Pension eligibility is 66, but will rise to 67, and perhaps even 68, in future. But I would like to be able to retire early if I choose to do so. So I think investing in dividend shares could help me to achieve that.
While some investors fear a stock market crash, I think it may actually give me a promising opportunity to bring forward my retirement.
Long-term investing and retirement planning
I am not a trader but an investor. What is more, when it comes to investing, I think a long-term approach can work best.
So instead of worrying about movements in share prices today or tomorrow, I prefer to buy stakes in what I think are great companies, if they sell for an attractive price. Retirement planning is best done over decades, which I think fits well with this long-term approach to investing.
But while I do not worry about short-term movements in share prices, that does not mean I ignore them. In fact, they could be key to me retiring early.
What is a stock market crash?
Take, for example, a stock market crash. That is a sudden fall in the price of shares, by a sizeable amount such as 20%.
While the share prices may have fallen however, is the same true of the value of the underlying businesses?
Often it is not. A share price fall can be dramatic and, as investor sentiment changes again, it might move up again. That can be a fast process, meaning I may have only a limited window during a stock market crash to scoop up shares in quality companies selling at bargain-basement prices.
That is why I think the time to prepare for a stock market crash is right now. Whenever it happens, I may not have time to research companies and their long-term prospects. By doing that now, I can decide what sorts of companies I would be happy to buy if they were on sale.
For example, shares on my own stock market crash shopping list include Diageo and Judges Scientific. I like these businesses, but I just do not find the current share valuations attractive.
Aiming to retire early
The benefit of buying cheap will hopefully be seen in share price growth over the long term.
But it also means I will earn a higher dividend yield than if I bought the same shares at higher prices. I always have a diversified portfolio of shares, but will illustrate this broader point with a specific example.
In one month early in 2020, Legal & General shares more than halved. If I had bought at the February peak, my yield now would be 5.8%. Buying during the following month’s stock market crash, those same shares would now be yielding 11.8%.
If I invested £10,000 and compounded the dividends, I could have doubled my money in 13 years. But if I did exactly the same during the crash, I could have doubled it six years earlier!
This example presumes a constant dividend and share price, which in reality is unlikely. But it illustrates how buying the same shares at a lower price during a stock market crash and compounding the dividends can bring forward the same result, helping me retire early!