A great way to protect myself if I’m facing a low-cash retirement is to buy the best FTSE 100 dividend shares in a Stocks and Shares ISA. A recent survey by Aviva found that more than half of people in mid-life (aged 45 to 64) have never worked out when they can afford to retire.
And Covid-19 has clearly made a bad situation worse. Some 29% said they were now less confident in their future than at the start of the pandemic.
That means every penny invested now could add a vital safety net to my future.
How to retire richer
I’d say that compounding my cash with the best FTSE 100 dividend shares is an easy way to ensure a happy retirement.
A quick caveat: one great year is no good to any of us.
If a company is not sufficiently successful, it could pay a huge 10% dividend yield at one point and then nothing the following year.
Our job as long-term investors is to find the best FTSE 100 dividend shares we think will keep paying out year after year. Then we can really take advantage of compound interest.
I see it as important for me to be doing it via a Stocks and Shares ISA, because any dividends paid to me are free of tax. This is a legitimate and widely-used way to shield my hard-earned cash from the taxman.
Working out winners
So which companies should I choose? How do I pick long-term winners for my Stocks and Shares ISA? I only buy when I’m reasonably confident that the market for a company’s product will persist in times both fair and foul.
As Benjamin Franklin famously said: “In this world nothing can be said to be certain, except death and taxes.” If I could invest in HMRC, I definitely would!
I ignore trendy shares, for example in cannabis, drones or high-cost, high-risk mining companies. Instead my favourites are proven FTSE 100 dividend-payers selling insurance, like Aviva, or prescription medications like GlaxoSmithKline. It is vanishingly unlikely that insurance or drug treatments will ever fall out of fashion!
As such the GSK dividend of 19p per share per quarter has persisted throughout the pandemic. It looks about as solid as a FTSE 100 dividend share can be.
Making it count
What will this all mean long term? Here’s a quick calculation.
A £10,000 investment in the best FTSE 100 dividend shares with a 5% annual yield will bear £500 in my first year.
What happens if I use that £500 to buy more shares in the same company and reinvest the dividends? My principal is now £10,500, and if the feat is repeated in year two, my dividend produces not £500 but £525. That’s more free money. I can sit on my hands, do nothing, and these numbers really start adding up.
By year three, my FTSE 100 shares will be worth £11,025. And my 5% yield now gives me £551.25 per year.
The longer I keep doing this, the more money I get. It’s when investors chop and change their portfolio that the vital process of compound interest is interrupted.
But just like a snowball rolling down a hill increases in size and speed, so steady dividend yields help increase the size of my pot.
In truth, patience is a vastly underappreciated virtue. And especially so when investing in the best FTSE 100 dividend shares.
TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.