I think investing for a second income from dividends is the smart thing to do. No matter how the stock market is reacting, dividends from reliable companies give me money in my pocket.
For now, I’m focusing on higher returns from stellar growth and value shares. Later, I’ll transfer cash from these into high-yielding dividend shares.
And I’m convinced that with this strategy, I could retire with £1,000 in dividend income to supplement my State Pension.
Dividend heroes
When looking for dividend opportunities, ‘dividend heroes’ might seem like the obvious place to start. Put simply, they’re companies that have raised their dividend for a minimum of 20 uninterrupted years.
Here are five top contenders in the UK dividend heroes list, as sourced from the Association of Investment Companies:
- JPMorgan Claverhouse Investment Trust – 5.4% yield – 50 consecutive years
- Murray Income Trust – 4.5% yield – 50 years
- The Scottish American Investment Co – 2.9% yield – 49 years
- Witan Investment Trust – 2.7% yield – 48 years
- Merchants Trust – 5.5% yield – 41 years
Each of these dividend yields are approximate. They’re also subject to change, of course.
Yet the overall financial growth of these companies isn’t that appealing. Their returns are almost like bonds.
Growth, value and safety first
I’m looking for higher returns from growth and value shares instead of dividends in the earlier portion of my life. That way I can build up a nice base of capital to focus on high-yielding dividend shares later.
I have to be careful, though. Stock market crashes, severe life events, and other unforeseen happenings can disrupt a long-term investment strategy.
That’s why I think it’s always good that I invest consistently and keep focusing on long-term security.
How I’d invest for the future
Understanding that, I reckon at age 50 I’ll put approximately 50% of my assets into high-yielding dividend shares with a consistent track record of payouts, like the ‘dividend heroes’. Those amounts should protect me nicely from stock market crashes nearer retirement.
The S&P 500 index’s average annual return is 10% over the long term, so that’s what I’m using for my forecasts.
If I started at £0 and invested £300 per month at a 10% average annual return for 25 years starting at age 25, I’d end up with £400,000 at age 50. That’s due to the power of compound returns.
At that point, if I were to put £200,000 into dividend shares, averaging approximately a 4% yield, I’d be getting £8,000 a year.
If my growth companies kept on generating high returns, by age 65 I could have a larger capital base to transfer into dividend shares. Of course, I could lose money, and there’s no guarantee my shares will grow at the 10% average annual rate.
However, If my remaining £200,000 in growth shares grew at 10% per year from age 50, I’d have £890,000 at age 65. Assuming I add £400,000 to my dividend shares at age 65, with a yield of 4%, I’ll be getting an extra £16,000 per year straight into my pocket. That’s on top of the £8,000 I’ve already been receiving, making a new total of £24,000.
That’s £2,000 per month. Or the equivalent of £1,080 per month in today’s terms considering an average annual inflation rate of 2.5% over 25 years.
Good job I saved that cash.
