Could buying dividend shares be the key to financial freedom?

This Fool wants to reach the point where he doesn’t have to worry about money. Could buying dividend shares play a part? Here he explores.

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I want to build my wealth by buying dividend shares. I think it’s one of the simplest ways for me to reach financial freedom. After all, creating a stable cash flow that allows me to stop worrying about money is the dream, right?

In the years to come, my goal is to have multiple streams of passive income helping me achieve my goals. But right now, I think buying income shares is a great place to start.

Compounding gains

I could go on about why I think shares that provide income are an effective way to build wealth. But there is one key reason. That’s because they allow investors to benefit from the power of compounding.

With the dividends I receive, I use these to buy more shares in the companies I own. Through this, it means that I earn interest on my interest. It also means that I’m able to build up my investment pot a lot quicker.

Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die”. That’s a quote I’ve tried to heavily instil into my investment strategy.

A favourite of mine

In my attempt to achieve financial freedom, I’m turning to the FTSE 100. The index is home to market-leading companies that have stable cash flows and, as a result, rising yields. That sounds perfect.

That said, there are plenty of companies out there that offer a meaty yield. But I only want to buy the best. I don’t want to buy shares today only for the yield to be reduced or cut in the times ahead. There is always that risk with dividends.

That’s why I’m only targeting high-quality stocks, like Lloyds Banking Group (LSE: LLOY).

I already own shares in the Black Horse Bank. But at their current price of 46.3p, I’m keen to add to my position.

The stock yields 6.1%, covered comfortably by earnings. That trumps the FTSE 100 average of 3.9%. For 2023, it hiked its dividend by 15% while it also announced a new share buyback scheme worth £2bn.

The stock has underperformed in the last five years. It took a further hit most recently following the release of its 2023 results.

One of the biggest risks with Lloyds is its reliance on the UK. That’s where it generates most of its revenues from. With it only expecting the UK economy to grow 0.5% this year, that could see its stock continue to wobble in the months to come.

However, it seems likely that interest rates will begin to fall in the last quarter of 2024. This should provide the stock with a boost as investor sentiment picks up. As the UK’s largest mortgage lender, falling rates will also help the business as the property market will be provided with some much-needed stability. Currently trading on just 6.4 times earnings, I also see real value in Lloyds.

Achieving my goals

It’s not as simple as just buying any dividend stock and waiting for the extra cash to come rolling in. And achieving financial freedom requires investors to do proper due diligence.

However, I’m confident that by targeting the right companies, I can edge closer to my goals.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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