The idea of earning money — from doing very little — sounds appealing to me. That’s why I like to invest in dividend shares.
Unfortunately, I didn’t start early enough in life. With the benefit of hindsight, I should’ve put all my spare cash into buying stocks and holding them for the long term. Of course, life is for living, so a balance needs to be struck between saving and spending. However, even in my younger days, I reckon I could have found £100 a month to invest.
But I believe the key to building significant wealth is to reinvest any dividends received into buying more shares. This is known as compounding.
So if I was starting my investing journey all over again, what could I hope to achieve over a period of 40 years?
Big yields
In my opinion, the key is to find stocks that are likely to pay higher-than-average dividends for a sustained period of time.
Personally, I’d focus on the FTSE 100. This index comprises the UK’s biggest companies, which means — in theory — their earnings (and therefore their returns to shareholders) should be the most reliable.
I’ve chosen three to illustrate the potential returns that could be generated.
The holy trinity?
BP (LSE:BP) is currently paying a quarterly dividend of 8 cents (6.14p) a share. This gives a current yield of 6.1%. In cash terms, the oil giant’s dividend is much lower than it was. But it was cut as part of its plans to make it more “resilient”. For example, in 2019 it was paying at least 8p every three months. But this means there’s currently plenty of headroom should the oil or gas price fall. During the second quarter of 2024, the group reported operating cash inflows of $8.1bn. No wonder its former boss described it as “literally a cash machine”. In the same period, its dividend cost $2.6bn (32%). It’s important to remember that BP’s payout is declared in dollars so the actual amount received is influenced by the rate of exchange.
National Grid is aiming to increase its dividend in line with the Consumers Prices Index, which is currently 2.6%. During the year ended 31 March 2024 (FY24), it paid 58.52p. Increasing this in line with inflation would suggest a payout of 60p for FY25, equivalent to a current yield of 5.9%.
Despite the housing market slowdown, Taylor Wimpey has managed to increase its dividend during each of its past four financial years. This look set to continue in 2024 with, in my opinion, a payout of 9.6p looking likely. If I’m correct, this gives a current yield of 5.8%.
Doing the calculations
The average of these three returns is 5.9%.
Investing a sum of £100 a month for 40 years, yielding this amount, would grow to £194,781. Not bad for a £48,000 investment. And remember, this assumes no capital growth. At this point, I could then spend the dividend income of £11,297, instead of reinvesting it.
But dividends are never guaranteed and shares can go down in value, so nothing can be taken for granted. And I’d have to do more research before deciding whether I should buy any of these three shares.
However, this theoretical exercise does illustrate the potential benefits of starting early and taking a long-term view.
