Over the next two decades, the State Pension age is expected to rise to 68. Of course, it could increase to an even higher age during that time, should the political consensus change further. With life expectancy due to rise and the cost of pension payments to taxpayers forecast to increase, it would be unsurprising for an even later retirement age to become the norm.
In response, many individuals will need to put in place their own arrangements in order to build a nest egg that’s capable of providing financial security in older age. One way of doing so could be to invest in dividend-paying shares, with their potential to offer impressive total returns over the long run.
Value for money
A stock with a high dividend yield can often mean that it offers good value for money. Provided there are sufficient financial resources to make dividend payments in the medium term, stocks with high yields could include a margin of safety in their valuations. This could provide investors with the opportunity to generate high capital growth in the long run, since over a multi-year timeframe dividend yields may return to their historic mean.
Of course, a high dividend yield can indicate a company is struggling from a financial perspective. It may be finding it difficult to generate profit growth, and this may have made it unpopular among investors. As such, checking that the fundamentals of a stock are sound before investing could be a shrewd move, since it may enable an investor to avoid value traps.
Financial performance
A company which is in the process of raising dividends could prove to be an appealing investment opportunity. Not only does a growing dividend suggest that its profitability is improving, it also indicates management is positive about its future prospects. This may convince investors to become more bullish about its outlook, and could lead to a rising share price over the long run.
While companies which offer a high rate of dividend growth may not always have the highest yields relative to their index peers, over the long run they could generate a higher income return. As such, dividend investing is much more complex than simply investing in stocks with high yields. A company with a generous yield and scope to pay a rapidly-rising dividend, for example, could prove to be a potent mix.
Defensive appeal
Stocks with strong track records of paying dividends may offer defensive characteristics. Given the uncertainty facing the world economy at the present time, this could be a highly appealing trait to have. A stock that’s been able to maintain dividend payments even during tough operating conditions could become more popular among risk-averse investors.
As such, in the long run they may be able to generate relatively high returns in a variety of stock market conditions. This could further increase their appeal for individuals seeking to build their retirement savings in order to overcome a rising State Pension age.