A lot of investors see ongoing appeal in dividend shares. The prospect of a stream of passive income from owning a stake in a well-known company is attractive to me.
But right now, I think a lot of UK dividend shares are particularly attractive because they are cheap. I reckon that could help make it more realistic for me to aim for a million.
Here’s why.
Share price and dividend yield
The price I pay for a share is one of the things that determine the dividend yield I earn from it (the other is the dividend per share).
As an example, consider Rio Tinto. At the moment, its yield is 7.9%. But if I had bought the shares at their costliest point in the past 12 months, my yield would be 6.4%. If I had snapped them up at the 12-month low point, I would be earning a yield of 9.6%.
As that example shows, buying the same share at different times can result in different – sometimes very different – yields.
If I hold the share for a year, that fact will already affect my dividend income. But if I hold it for a decade, the different yield based on my original purchase price could result in very different levels of income.
Bargain hunting
The average FTSE 100 yield tends to hover around 3% to 4%.
But right now, there are some blue-chip shares in the top index trading at what I regard as cheap prices. Some have dividends of 8% or 9%, like M&G and British American Tobacco. Vodafone is in double digits!
Not all of those shares appeal to me. Sometimes, after all, a high yield is a sign that the City perceives the risk of a dividend cut.
Nonetheless, I do think that there are some real bargains available to investors in today’s market even among the upper echelons of the UK stock market.
Compounding dividends
As my purchase price affects yield for as long as I hold dividend shares (if they keep paying out, which is not guaranteed), taking advantage of a bargain today could help me earn more income for decades to come.
Could I realistically take advantage of this to aim for a million?
I believe the answer is yes.
If I put £1,000 each month into shares starting today and was able to compound at an annual rate of 9%, I would hopefully have a portfolio worth a million pounds in 25 years.
A goal of 9% is a more than it may sound, especially year after year, including recessions.
However, I think if I take advantage of the current cheap valuation of some dividend shares, keep compounding, continue investing, and stay on the lookout for great companies with attractive share prices, over the long run I could realistically aim for a million!
