Buying dividend-paying shares can dramatically improve your chances of growing rich. Simply reinvest what you receive back into the market and wait. By the time you reach retirement, you should have a very decent nest egg. In fact, adopting such a simple strategy could even make you a millionaire!
But which dividend stocks should you buy? For those wanting to stick with only the biggest UK companies, I think these FTSE 100 constituents are great candidates.
Become a dividend millionaire
FTSE 100 power provider National Grid (LSE: NG) doesn’t have the most electrifying reputation among investors. For those looking to build their wealth by allowing dividends to compound, however, this really isn’t the point. Dull is good.
Analysts predict that the company will return 49.5p per share to investors in FY21. At the current share price, that gives a super yield of 5.3%. Now compare this to the paltry 1% interest you’re currently able to earn from the best Cash ISA available. Is it any wonder that many, including me, think holding too much cash is the biggest way of killing your retirement dreams?
Shares in National Grid currently change hands for almost 18 times earnings. That’s fairly high, at least relative to the firm’s average valuation over the last five years (13 times earnings). However, this premium is probably due to investors regarding the company as something of a safe haven in the current climate given the predictability of its earnings.
National Grid won’t make you a millionaire on its own. Held as part of a dividend-generating portfolio, however, it takes some beating.
FTSE 100 defence behemoth BAE Systems (LSE: BA) might not to every investor’s taste. For those looking to become ISA millionaires by reinvesting their dividends, however, I think the firm is another excellent pick.
Having understandably paused its policy earlier in the year, the £16bn cap announced in July that it would kickstart dividend payouts again. This move, coupled with the firm’s belief that business will rebound in the second half of 2020 should be a comfort to those already invested.
The shares trade on just 10 times forecast FY21 earnings. That looks seriously good value to me, especially when you consider that the company, like National Grid, has a long history of consistently hiking its dividend.
Assuming it returns the 25p per share analysts predict in 2021, BAE yields just over 5%. The fact that the total dividend should be almost twice-covered by profits also helps to greatly reduce the possibility of a cut anytime soon.
Packaging giant Mondi (LSE: MNDI) completes this trio of dependable dividend payers from the FTSE 100.
Unlike the other two income stocks mentioned, analysts are forecasting a dip in the dividend next year to a little less than 59p per share. Even so, this still leaves the shares yielding 3.6% at their current price with the payout likely to be covered twice by profits.
Mondi is due to release an update on trading on October 15. The decent recovery seen in the share price of late would suggest investors are optimistic about its outlook. Not that the performance over a short trading period should really concern would-be dividend millionaires. The message for them is simple: receive, reinvest, repeat.
On just 13 times expected earnings for FY21, Mondi offers great value in my view.
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Paul Summers 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.