Work can be a long, hard slog for many people. The idea of retiring early can be an appealing one. Right now, some British income shares have unusually good dividend yields. In fact, I think stocking up on them at current prices could be a very rare opportunity for me to bring forward my retirement plans.
Quality on sale
That is because some shares currently have yields that are higher than their historical norm.
Take British American Tobacco as an example. I already hold a stake in the cigarette maker, so why did I buy more of its shares this month?
A combination of dividend growth and a share price close to a 52-week low meant that the British American yield was much higher than its historical average. In fact, the yield on offer was as high as it has ever been for British American in my lifetime, close to 9%.
Compounding
As a long-term investor, simply earning a dividend today is not really what excites me, though. It is the potential for long-term dividend streams by building a portfolio of income shares then reinvesting the dividends.
That is known as compounding. Compounding is where apparently small differences in yields really start to matter.
To illustrate, imagine I invested £20,000 in shares with an average yield of 9%. As an alternative, imagine I did the same thing with shares yielding an average 8%.
That 1% difference may sound very small. But after 20 years, at 8% I would have a portfolio worth over £93,000 and generating around £7,450 annually in dividends. At 9%, I would already be earning a bit more than that after 17 years.
In other words, that 1% of extra yield could allow me to generate the same income three years earlier. Investing a big enough sum and depending on my financial circumstances, that could help me retire early.
I’m buying now!
It can be tempting to think that high-yield income shares will be around for a long time. The UK economy is fragile and interest rates are high.
From M&G with its 9.6% yield to 8.3%-yielding Legal & General, the FTSE 100 seems stuffed with blue-chip income shares at bargain prices right now.
But that could change.
Such yields might not be here to stay, if share prices increase. I do not want to end up kicking myself that I missed out on a golden opportunity to invest in successful, profitable blue-chip businesses when they were offering unusually high dividend yields.
That is why I have been stuffing my Stocks and Shares ISA with dirt cheap, high-quality income shares while I have the opportunity. I do not think it will last forever – and I will hopefully be reaping the rewards of today’s choices far into the future.
