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£5k to invest in UK shares? I’d buy cheap dividend stocks in an ISA to get rich and retire early

While dividends have been cut among many UK shares over recent months, a number of FTSE 100 and FTSE 250 stocks continue to offer attractive passive income prospects. Buying them now while they offer good value for money could produce impressive long-term returns, as well as an attractive income opportunity.

With interest rates set to remain low in the coming years, dividend stocks could become increasingly popular among investors. As such, now could be the right time to invest £5k, or any other amount, in a diverse range of shares while they trade at bargain prices. They could help to bring your retirement date a step closer.

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Cheap UK shares

With the stock market having experienced a major market crash in recent months, a number of UK shares trade below their historic averages. Certainly, they may experience challenging operating conditions in the coming months. However, in many cases, they appear to have the financial strength to overcome short-term risks. That means they can then benefit from a long-term economic recovery.

As such, buying bargain FTSE 100 and FTSE 250 stocks today could produce impressive returns over the coming years. Investor sentiment and the performance of the economy have always drastically improved following previous declines. The challenges facing investors may be unprecedented in 2020. But buying undervalued UK shares now and holding them for the long run could produce high returns in a likely market recovery.

Dividend stocks

Dividend stocks could be among the best-performing UK shares in the coming years. As mentioned, a number of companies have postponed or cut their dividends in recent months in response to an uncertain operating outlook. Therefore, there’s less choice for income investors. This may mean those businesses able to maintain, and even grow, their dividend payouts may become very in-demand among investors. This may push their valuations higher, and lead to strong total returns.

As well as their capital growth potential, dividend stocks clearly offer a relatively high income investing opportunity. With interest rates now at historic lows (and set to remain there for some time) investors who’d normally buy other income-producing assets, such as bonds, may focus their capital on dividend stocks. This may push demand for dividend shares even higher, which could lead to rising prices for UK shares.

Diversification

While there’s less choice for investors who are seeking to generate an income from UK shares than there was at the start of the year, it’s still possible to build a diverse portfolio of FTSE 100 and FTSE 250 dividend stocks. Through diversifying across multiple sectors and companies that operate in a range of countries, you can obtain a resilient income that could help to boost your portfolio’s prospects. It may even bring your retirement date a step closer.

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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.

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