I strongly believe that dividend shares are the key to my future prosperity. I reckon I’ve got 15 years left of investing before I retire. By the time I get to 65, I’d like to live off the passive income generated by my share portfolio.
But as tempting as it might be, I don’t intend taking any dividends as cash until I reach my dotage. Instead, I’m going to reinvest them hoping to boost my income later in life.
If I was to utilise all of my £20k ISA allowance this year — unfortunately, I’m not in a position to do so — I’d try and find three high-yielding shares and invest an equal amount in each.
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Top three
My first choice would be Diversified Energy Company. Not everyone would be comfortable owning shares in this US oil and gas producer. But its twin strategy of acquiring existing fields, rather than taking on the risk and expense of developing new ones, and seeking to hedge the selling price of the majority of its output, means its earnings are steady and reliable. It can therefore pay a generous dividend. Last year it returned 17.25 cents per share. If repeated this year, based on current exchange rates, its shares yield an impressive 15.8%.
I also like Topps Tiles. Even though it does have an online presence, the company claims that 98% of its sales involve a visit to one of its 304 stores. The directors intend to return 67% of earnings to shareholders over the next two years. If fulfilled, this would give a return of 8.9%.
My final pick is Reach. It owns a portfolio of national and local newspapers, including the Mirror, Daily Star, and Manchester Evening News. Conscious that newspaper sales are in long-term decline, the company is transitioning to an online subscription model. Assuming last year’s dividend of 7.34p per share is paid in 2023, the yield on the shares is 10.5%.
Some numbers
The table below shows how a £6,667 investment made in each today could grow over the next 15 years, assuming the dividends are reinvested and the share price remains unchanged.
| Stock | Yield (%) | Initial no. shares | No. shares purchased over 15 years | No. shares after 15 years | Annual dividend after 15 years (£) | Value after 15 years (£) |
| Diversified Energy Company | 15.8 | 7,729 | 62,059 | 69,788 | 9,510 | 60,192 |
| Topps Tiles | 8.9 | 13,746 | 35,638 | 49,384 | 2,132 | 23,951 |
| Reach | 10.5 | 9,524 | 33,060 | 42,584 | 3,130 | 29,809 |
| Total | 30,999 | 130,757 | 161,756 | 14,772 | 113,952 |
Come 2038, I’d change my strategy and start banking the payouts to help fund my lifestyle.
This would give me an annual retirement income of £14,772, or £1,231 a month. That’s nearly 40% more than the current state pension of £10,600 a year.
Caution
But 15 years is a long period. There’s plenty of time for things to go wrong.
One-off events, changes in market conditions, or a wider economic downturn could affect the earnings of these companies. This means they would have to cut their dividends from their present levels.
More specifically, the transition to net-zero could reduce the demand for oil and gas. Consumers might abandon visiting retail parks to buy tiles and go online instead. And newspapers — both print and digital editions — could soon be a thing of the past.
However, by regularly reviewing my ISA and keeping tabs on these companies, I’d hope to be able to identify at an early stage any issues that might see them cut their dividends.
In these circumstances, I could find an alternative stock and, hopefully, remain on track to achieve my monthly four-figure retirement income.
