Pensions, medical insurance, dividend shares: the list goes on. There are lots of things that can seem very important later in life that do not necessarily seem that exciting in one’s twenties.
But when it comes to buying shares that pay dividends, if I was in my mid-twenties again and had the chance to begin buying, I would do that. Indeed, I would aim to invest £150 per month in such shares – and more if I could afford it.
Here’s why.
Time on your side
A few years can make a big difference when it comes to investing.
Imagine I invest £150 each month and earn 5% annually on my portfolio, which I reinvest. If I started doing that aged 35, by 65 my portfolio would be worth £122,000.
But if I began at 25 – just one decade earlier – by 65 my portfolio would be worth £222,000. In other words, an extra decade of investing £150 each month would give me an additional £100,000 by the time I hit 65.
The earlier I start, the more time I will have for the long-term impact of investing to show itself.
My example of 5% already showed a dramatic benefit by starting younger. That would be even more pronounced with a higher yield than 5%. Currently quite a few FTSE 100 dividend shares yield more than 5%, such as M&G, Rio Tinto and British American Tobacco.
Passive income stream
In my example above, I talked about reinvesting the dividends. That is known as compounding and can be a force multiplier financially.
But I could also take out the dividends as passive income if I wanted. Even if I did not compound any, putting £150 into shares every month year after year would mean I ought to have a growing stream of dividends available to me.
However, that would depend on the quality of my portfolio. If I bought shares without properly understanding their long-term business prospects, it may be that they perform well in the short term but do not live up to my income hopes over time.
When it comes to choosing shares for my portfolio, I do not think there is such a thing as too high-quality a business. But great businesses can be costly to buy – so I also pay close attention to valuation when buying shares.
Live and learn
All investors make mistakes.
One good thing about starting investing at 25 is that one can make some of the basic mistakes while young and still have a long investing timeframe ahead. Having learnt at an early age, an investor can become more experienced as they get older and have higher amounts of disposable income to put to work in the stock market.
If I was 25, I would not think about dividend shares as something just for the future. I would already start to put money aside regularly and begin building a portfolio that hopefully could grow over time.
