If I close my eyes and think about retiring with £500k in my bank account, it makes me smile. Of course, dreams don’t work unless you do. That’s why I’m focused on investing in dividend shares now to try and boost the potential to reach this goal. Here’s my idea on how to make a crazy idea possible.
Breaking down the idea
The actual investment strategy is the simple part. I need to find and purchase solid dividend stocks I’m confident can pay me sustainable income for the future. Given that I’m going to be investing over the course of many years, I don’t need to get too bogged down in finding the perfect portfolio today.
Even if I can just find a couple of stocks that I like right now, it’s a good start. Over time, the market constantly changes, throwing up new opportunities. Investing over time also helps me if one income stock cuts the dividend. By moving with the times I can reduce my dependency on a stock I bought a while ago.
My strategy hinges on taking the dividend payments and reinvesting it back in the market straight away. This allows me to benefit from compounding. This means my investment pot will keep growing because I’m adding the dividends to my fund, alongside any new cash I can put in.
I could take the dividends and spend them as they arrive. Yet this will really slow my progress in the aim of reaching half a million.
Talking about the numbers
The complicated part is the money involved. I simply can’t hope to invest £100 a month and expect to be able to hit £500k before retirement. Even with a dividend yield of 6-9% and compounding returns, I have to invest more.
Naturally, this might mean the goal of half a million is just not obtainable. However, I expect my income to increase over time. So the monthly amount I can set aside now (even though it might be a stretch), should become much easier in years to come.
As an example, let’s say I set aside £500 a month now. If I can target an 8% yield, this would be a good start. In five years’ time, let’s assume I can increase the funding to £750 a month, with the same yield. After another five-year stretch, my higher income could allow me to invest £1,000 a month.
If I keep up this same trajectory, in year 21 my forecasts indicate my portfolio value would pass £500k.
Of course, there are a lot of things that could go wrong over the next two decades. My income might not increase as planned. The dividend yield target could be set too high.
Yet to consider that, from a standing start, it could technically be possible to use dividend shares to achieve a lofty goal, it’s quite something for me to consider trying.
