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No savings at 40? I’d buy FTSE 250 dividend stocks to retire on a passive income

Having no savings at age 40 does not mean that it is too late to retire on a generous passive income. Since you have a long-term time horizon, investing in the stock market could be a worthwhile move.

And with the FTSE 250 currently trading on an attractive valuation, it could produce strong total returns in the long run that improve your prospects of enjoying financial freedom in older age.

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Track record

The past performance of the FTSE 250 highlights its impressive level of total returns. For example, over the past 20 years it has recorded an annualised rate of capital growth of around 6.2%. When its dividends are added to that figure, it is in excess of 9%. This suggests that the index could offer a means for you to build a surprisingly large nest egg between now and when you retire.

Furthermore, during the last 20 years, the FTSE 250 has experienced a number of challenges. They include the tech bubble bursting and the global financial crisis. Yet it has still been able to produce a high rate of return. As such, it may face an uncertain future at the present time due to threats such as Brexit, but its long-term outlook continues to be bright.

Dividend potential

In terms of its income prospects, the FTSE 250 is surprisingly attractive. Certainly, it has a dividend yield of 3% that is around one percentage point lower than the FTSE 100’s income return. But with around a quarter of mid-cap shares currently having yields that are in excess of 5%, there is a great deal of choice from which you can build a diverse portfolio of income shares.

Since a significant proportion of the index’s total returns have historically been derived from the reinvestment of dividends, buying dividend stocks could be a shrewd move. They may not appear to be as exciting as growth stocks at first glance, but in many cases their risk/reward ratios could be highly appealing.

Valuations

With the UK having left the EU at the end of January 2020, the political and economic risks facing the country may be relatively high at the present time. This may mean there are additional risks facing investors.

However, in many cases they have been factored in to the valuations of FTSE 250 shares. This means that investors may be able to purchase a range of high-quality stocks while they trade at wide discounts to their intrinsic values. Buying them now could further improve your risk/reward ratio and lead to higher returns in the long run.

As such, now could be the right time to start investing for your retirement. The FTSE 250 appears to offer the chance to obtain impressive returns that could build a nest egg from which you draw a generous passive income in older age.

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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.