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Stop saving and start buying FTSE 100 dividend stocks: how I’d aim to make £1m

While the FTSE 100 has experienced major ups and downs since its inception in 1984, its overall trajectory has been an upward one. In fact, it has risen by around 6% per annum over the last 35 years. And while there are no guarantees regarding its future performance, a similar return over the next 35 years would be unsurprising.

By contrast, cash returns have been disappointing – especially over the last decade. As such, now could be the right time to pivot away from savings accounts and instead invest in FTSE 100 dividend shares in order to increase your chances of making £1m.

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Return differential

When the FTSE 100’s current dividend yield of 4.3% is added to its long-term capital return, it could realistically obtain a 10% total return per annum over the long run. While that may not be possible in every year due to the cyclicality of the stock market, an investor may realistically aim for such a return over a sustained period of time.

Even assuming a lower return of 7% per annum could have a significant impact on your financial future. Based on investing £250 per month over a period of 30 years at a 7% return, you could have a nest egg of £283,000 by the end of the period. This could be used to provide a passive income in older age, which could prove to be useful given the prospect of the rising State Pension age and the fact that the pension amounts to just £8,767 per year.

Saving your excess capital, rather than investing it in the FTSE 100, could mean that your pot is relatively meagre. Assuming a 1.5% annual interest rate, £250 saved per year would amount to just £112,000 by the end of the 30-year time period. Certainly, interest rates could move higher in the coming years. But, as the last decade has shown, it would be unsurprising for them to remain low for a sustained period of time. Therefore, holding cash may prove to be an unwise move.

Risk prospects

While saving money comes with lower risks than investing it, for an investor with a long-term horizon the ups and downs of the FTSE 100 may not prove to be a major challenge. After all, the index has always recovered from its downturns to post higher highs. As long as you have enough time for it to recover from future bear markets, the index could offer a superior risk/reward ratio than cash savings and a higher chance of making a million.

Furthermore, with there being a wide range of shares offering high dividend yields at the present time, it may be possible to boost your total returns versus cash holdings. Dividend shares may also offer greater defensive appeal than the wider index, as well as cash flow during downturns that provides you with the opportunity to buy high-quality shares while they trade on lower valuations.

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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.