Can I become richer than my boss? It’s unlikely if I only rely on my employer’s salary and don’t invest my savings. But if I have a growing source of passive income outside of my regular wage, then it becomes more than possible over time.
This is especially true if that passive income source is dirt-cheap, high-yield dividend shares. As luck would have it, the UK stock market is absolutely packed with such stocks right now.
A valuation gap
According to an April report released by wealth management firm Schroders, the UK market’s forward price-to-earnings multiple was 17% below its 15-year median. That valuation gap remains today.
This means that many high-quality FTSE 100 stocks, including Shell, Diageo, and Experian, are trading at a significant discount to their international peers right now.
Why is this? Well, there are numerous factors ranging from sluggish economic growth to the political chaos of three prime ministers in a two-month period last year.
In and out of favour
However, I doubt this discount will persist indefinitely. That’s because as companies grow their earnings while share prices fall, their market valuations get cheaper and cheaper. At some point, that value should attract global investors searching for bargains.
I only have to look at the Japanese stock market to prove this is possible. The country’s lacklustre economic growth — sound familiar? — and other issues made Japanese equities unpopular for a long time among international investors.
Yet Japanese shares are flourishing in 2023, with the Nikkei index reaching multi-decade highs in June.
Legendary investor Warren Buffett recognised this rare opportunity in late-2019 when he first started scooping up cheap Japanese shares. His investment in Japan’s stock market has now more than doubled in just three years.
The reality then is that certain markets fall in and out of favour with investors. So, I’m increasingly seeing today as a once-in-a-lifetime chance to secure both capital gains and ultra-high dividend yields with discounted UK shares.
High-yield example
One dividend aristocrat in my own portfolio that I’d use as an example is insurance giant Legal & General. The stock is trading on a bargain-basement P/E ratio of 6.2, with the current dividend yield a mouth-watering 8.5%.
On a forward-looking basis, the yield is a monstrous 9%. That soars above the 3.8% market average. Brokers have pencilled in payouts of 20.3p per share this year and 21.3p in 2024.
If the payout keeps rising in future, which isn’t certain, this stock could become a mini-goldmine in my portfolio.
Bossing it
For illustration purposes, let’s assume I start with £5,000 and invest a further £200 a week (or £10,400 a year) in UK stocks that produce an average annual return of 8.5%. Then I reinvest the dividends as the years go by.
After 18 years, assuming the average stays the same, I would have £446,250. By this point, with an 8.5% annual return, my portfolio could be generating me just under £38,000 in passive income.
Add this to my salary and, all things been equal professionally, I could have more disposable income than my boss.
The takeaway here is that my total income is not limited to my wage. I can make more if I build wealth from regular investing and unleash recurring passive income.
