Dividend investing is a powerful strategy that can help my wealth accumulate over time. There are two important factors when it comes to building long-term wealth. One is the longer duration I can give to allow my investments to grow, the better. The other is topping up the pot. Dividend reinvesting is one way to top up the pot with little effort.
Get started now
When it comes to time, the here and now matters. Getting started right away is always preferable to putting it off. It doesn’t matter if I can only afford to invest a small amount each month, what counts is that I start.
The power of compounding means that gradual-but-steady investments build up over time. The key lies in getting started. Putting it off until later achieves nothing. It’s been proven time and again that the younger investors are when they start in the stock market, the more likely they’ll bank considerable sums in the future.
The younger the better
Interest rates also matter. The higher the interest earned on an investment, or via the dividend yield, then the faster I can accumulate wealth. For instance, if I invest a lump sum of £2,000 and regularly top up £250 a month from age 19, earning interest at 5% a year, I can accumulate over £536k by the time I’m 65.
If I start at age 26, then I can only expect to achieve £363k by retirement.
Meanwhile, if the interest rate is 9%, then by investing from age 19 to 65 I can expect to achieve £1.8 million, and from age 26 just over £1 million.
I think this captures the power of compound interest and the importance of getting started from as young an age as possible, even though I also know I might not achieve those returns.
Two dividend stocks
So with all that in mind, here are two dividend stocks with yields over 6% that I’d consider buying today.
FTSE 100 stock Legal & General is a major insurance and pensions provider with several revenue streams. It’s a well-established and recognised brand. As a dividend stock, I find it attractive because I think it’s not overpriced and offers a generous yield. The Legal & General price-to-earnings ratio (P/E) is 10, earnings per share (EPS) are 27p and its dividend yield is 6%. Dividend cover is only 1.5 times earnings, so that makes it more at risk if the company runs into trouble, but I’ll take my chances for now.
Top global mining company Rio Tinto has seen its share price soar in the past year. It’s prone to volatility, but its 6% dividend yield helps calm the ride. The FTSE 100 stock has a P/E of 14 and EPS are 426p. I think Rio Tinto should be monitored more closely than other dividend stocks due to the cyclical nature of mining. But for now, commodities are in rising demand and for that reason I’d buy shares in this miner for my Stocks and Shares ISA.
I’ve started later in life, but I think the power of compounding can still help me generate a decent nest egg. That’s why I like dividend stocks to set me up for a financially healthy future.
