Buying FTSE 100 dividend stocks on a regular basis could produce a large nest egg in the long run. From this, it may be possible to draw a substantial second income in retirement so that you are less dependent on the State Pension.
With the State Pension currently amounting to just £8,767 per year, it is unlikely to be sufficient to cover all of a retiree’s outgoings. As such, by investing even modest amounts in FTSE 100 companies and reinvesting dividends received, where possible, obtaining financial freedom in older age may become increasingly likely.
One of the main advantages of regular investing is that it is a low-cost means to gain access to the FTSE 100’s growth potential. Many online share-dealing providers offer a regular investing service, with the cost per transaction being as low as £1.50. This makes it affordable to small investors, as well as cost-effective for larger investors. By keeping commission costs to a minimum, it may provide higher long-term returns.
Regular investing also means that an investor buys stocks during a variety of market conditions. For example, if they invest a specific amount on a monthly basis, they will inevitably buy during bull and bear markets. This may not appear to be especially significant, but it could provide them with a major advantage over their peers. That’s because many investors buy during bull markets, rather than bear markets, due to them having greater confidence in the economic outlook. However, history shows that confidence can be a misleading indicator when it comes to buying shares, with regular investing helping to remove emotions from the investment decision-making process.
FTSE 100 dividend stocks
Buying FTSE 100 dividend stocks could prove to be a shrewd move in the long run. In many cases, dividend-paying shares with a track record of growing shareholder payouts are financially sound and have improving outlooks. This can lead to relatively high returns in the long run, as well increasing demand from other investors for their shares that provides a boost to their valuations over time.
Of course, it is the reinvestment of dividends that can lead to a relatively large nest egg in the long run. Although the impact of compounding may not be apparent over a period of months and even a few years, over the long run, holding on to stocks and reinvesting dividends received can have a surprisingly large impact on your financial position. Indeed, over the last 20 years, the vast majority of the FTSE 100’s total returns have been from dividends, rather than from capital growth.
At a time when the State Pension is low and the age at which it starts being paid is set to rise, obtaining a second income in retirement could become increasingly important to many people. By investing in dividend-paying large-cap shares on a regular basis, you could build a nest egg from which a generous income can be drawn.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.