The State Pension age is currently 66 but is due to rise to 67 between 2026 and 2028. Eventually it will rise further to 68 and possibly beyond. I’d rather not wait that long for my retirement. In fact, I’m planning to retire much earlier and I aim to do so by investing in a basket of FTSE 100 dividend shares.
Why dividend shares?
Dividend shares offer a form of income to investors like myself. Companies that pay dividends pay a portion of their profits to shareholders. These payments are called dividends. Every company pays out a different amount of dividend. But the UK’s largest 100 companies pay an average dividend yield of 3.5%.
That’s not too bad, given record low interest rates. However, some FTSE 100 companies like Persimmon and Imperial Brands can pay over 8% per year.
At 8% annually, I could achieve an additional passive income of £16,000 from a pot of £200,000. That’s quite achievable with a long enough time frame, in my opinion. To build a £200,000 pot, I calculate I’d need to invest £4,400 a year over 20 years.
The big lesson here is to start as early as possible. For instance, if I had just an extra five years until I wanted to retire, I calculate I’d just need to save around £2,800 a year instead.
Factors to be aware of
Bear in mind, however. The 8% dividend yield offered by those companies isn’t guaranteed. Several factors affect how much is paid out to shareholders. Companies need to carry on making profits. If the business deteriorates, the dividend can often be cut.
Some dividend yields can often be too high, in my opinion. If I see a dividend yield of over 9%, I’m more cautious regarding whether it can be sustained or not. For me, the sweet spot is a dividend yield of 4%-8%.
Some dividend shares have a better track record than others. For instance, a company that has paid a dividend for the past 10 years might be seen more positively than one that has only paid a dividend for a year.
Consistency is another factor I look out for. For a reliable passive income, I want to have consistent and stable dividends. I like to find companies that pay dividends every year rather than those that start and stop payments.
When investing in dividend shares, it’s also important to note that the value of shares can fall as well as rise. So I like to find companies that operate high-quality businesses with growing earnings. Although still not guaranteed, it gives me more confidence in my selections.
Favourite dividend shares
Noting all the above, I currently like Phoenix Group, BP, and Aviva. All three FTSE 100 shares offer a dividend yield of over 5%. They also have sufficient earnings to pay for those dividends. Lastly, they’re consistent and reliable dividend payers. Overall, I’d be happy buying all three for my early retirement fund.
