Following the Bank of England’s decision to slash interest rates earlier this year, rates on savings accounts have plunged. As such, I think dividend stocks could now be a much better investment, for those savers looking to retire early.
Today, I’m going to explain why.
The benefits of dividend stocks
Savers would be hard pushed to find a flexible savings account today that offers more than 1% per annum in interest. On the other hand, the UK stock market supports an average dividend yield of around 3.5%.
Therefore, dividend stocks are more attractive from an income perspective in the current environment.
However, I don’t think it’s sensible for savers to put 100% of their money into dividend stocks. This approach would leave them with no cash cushion to cover any unforeseen expenses.
Instead, I think it may be sensible to invest a large percentage of savings into high-quality dividend stocks. An allocation of 60-70% would allow savers to boost their interest income while keeping some money back. This is only a rough guide and will vary from person to person.
Still, if you’re serious about being able to retire early, using dividend stocks to boost your income could be a very sensible strategy.
However, some of these distributions should be avoided. Investors should stick the companies that can maintain their payouts.
I’d be drawn to businesses that have a high level of dividend cover, strong balance sheets and durable competitive advantages. To put it another way, concentrating on the level of the dividend yield alone could be a mistake.
A 3% dividend or so might not look attractive compared to a 10% payout. But I’d rather have a 3% yield for 10 years than 10% for a year.
Focus on the long term
If you are looking for investments to help you retire early, I highly recommend focusing on blue-chip dividend stocks. Companies like Legal & General and Halma are both great examples.
These two are leaders in their respective fields and have a long track record of returning cash to investors with dividends. Considering the economies of scale both organisations have, I reckon it’s likely this trend will continue.
An investment of £5,000 in these two businesses would produce a dividend yield of 5.2%. There’s also the potential for capital growth in the long run.
With their higher returns, these two dividend stocks could help you retire early, but they’re not the only companies I’d consider for an income portfolio. There’s a whole range of high-quality blue-chip stocks out there on the market that offer high single-digit dividend yields.
So what are you waiting for? Now could be the time to stop saving and start buying dividend stocks.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Halma. 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.