Finding the time to invest your hard-earned cash can be difficult when the demands of everyday life are taken into account. As a result, many people either choose not to invest in the stock market, preferring savings products such as a Cash ISA, or buy a small number of growth stocks that they hope could help them to retire early.
While both of these strategies may appear to be effective in generating a favourable return over the long run, there may be a simpler means of producing a sizeable nest egg by the time retirement comes along.
FTSE 100 dividend stocks
Buying FTSE 100 dividend stocks may at first appear to be an investment strategy that is best suited to retirees who are looking for an income to supplement their State Pension. However, it may also be a worthwhile means of generating impressive total returns prior to retirement in order to produce a large nest egg from which an income can be drawn in older age.
Various studies have shown that the reinvestment of dividends, and their subsequent compounding, can make up a large proportion of the total returns that investors receive from investing in the stock market. As a result, over the long term their overall returns could be ahead of a number of growth stocks that may have more exciting business models.
Furthermore, the payment of dividends can indicate that the company in question has a sound financial future that could produce a rising share price. Increasing dividend payments, for example, may suggest that company management is confident about the outlook for the business, and that it has a sound financial future.
Buying dividend stocks
Of course, simply buying a handful of large-cap shares with high yields may not be a good idea. Investors should still focus on company fundamentals, such as balance sheet strength and valuation, as well as their strategies and future earnings growth potential.
However, with the FTSE 100 having a dividend yield of 4.5% at the present time, it could be the right time to focus on dividend stocks. In many cases, they currently offer excellent value for money and are expected to deliver rising shareholder payouts over the medium term. They may also have less risk attached to them than cyclical growth shares at a time when the prospects for the world economy are uncertain.
Moreover, with income investing being focused on a buy-and-hold strategy, dividend stocks are normally held for the long term in order to allow the reinvestment of dividends to have their desired impact on a portfolio’s value. Therefore, buying them may prove to be a less time-intensive strategy than trading growth shares, for example. This could make it a more realistic means of investing in the stock market for time-poor individuals who are looking for a simple, but effective, means of generating a sizeable nest egg so they may be able to retire early.
