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Why cheap dividend stocks can help you retire early after this market rally

Dividend stocks could become increasingly popular among income-seeking investors over the coming years. Low interest rates may mean they offer the most attractive return profile among mainstream income-producing assets.

Therefore, buying a selection of dividend stocks while they’re cheap could be a sound move. Although the recent market crash may or may not yet be over, the prospect of a long-term market rally may mean dividend stocks offer strong capital returns in the coming years that helps you to retire early.

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Low interest rates

The uncertain outlook for the world economy could mean interest rates experience a prolonged period at low levels. This may help to support the economy while it faces an unprecedented crisis. But it leaves income-seeking investors with a lack of choice when it comes to generating a return from their capital.

For example, mainstream income-producing assets, such as cash and bonds, may become relatively unpopular. They may fail to offer an inflation-beating return over the next few years. This could increase demand for dividend stocks. That’s because many companies now offer relatively high yields following the recent stock market crash.

Certainly, there’s scope for dividends to be cut across many sectors where sales and profitability have come under pressure. But a number of companies and industries have reported solid financial performances of late. As such, their shares may experience increasing demand from investors. Especially if they’re able to increase dividends at an above-inflation pace.

This could lead to a rise in dividend stocks prices to complement their attractive income returns over the long run, which may boost your portfolio returns.

Stock market recovery

The stock market’s long-term prospects appear to be relatively bright. A sustained recovery may seem unlikely at present. Risks, such as the potential for a second wave of coronavirus later in the year, as well as geopolitical challenges concerning the US and China, are constant concerns.

However, stock market recoveries seemed unlikely during previous crisis. And, while they can sometimes take a number of years to materialise, long-term investors who are building a nest egg for retirement are likely to have sufficient time to benefit from them. As such, equities appear to offer the most obvious means of generating an attractive total return over the long run.

Increasing popularity of dividend stocks

Dividend stocks could be relatively popular during a market recovery. Not only for their income prospects, but also because a growing dividend suggests financial strength and confidence among a company’s management team regarding its growth potential. Investors may view a company with the financial strength to maintain its growing dividend in a more positive light relative to its peers.

This may increase demand for its shares and lead to a higher stock price, which boosts your chances of retiring early.

A top income share that boasts a reliably defensive business model… plus a current forecast dividend yield of 4.2% to boot!

With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…

As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.

With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?

Fortunately, The Motley Fool is here to help…

Our analyst has unearthed what he believes could be a very attractive option for income- seeking investors – a company that, in his view, boasts a ‘reliably defensive’ business model, combined with a current forecast dividend yield of 4.2% to boot!*

But here’s the really exciting part…

This business even has form in riding out this kind of situation, too… having previously increased sales and profits back in 2008 and 2009 when the world was gripped in the deepest economic crisis since the Great Depression.

*Please be aware that dividends are variable and not guaranteed.

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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.