How FTSE 100 dividend shares can boost your State Pension and help you retire early

I think that FTSE 100 (INDEXFTSE:UKX) dividend stocks offer good value for money at the present time, as well as long-term growth potential.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 5 October, 2019 1:18 pm BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Trying to live off £730 per month is no easy task. However, that’s the amount that retirees receive from their State Pension.

As such, it seems to be imperative that people of working age make retirement plans a priority. Otherwise, they may find that the financial freedom they had hoped for in older age does not come to fruition.

FTSE 100 dividend shares

One means of planning for retirement is to invest in FTSE 100 dividend shares. This could prove to be a sound move at the present time, since a wide range of large-cap income shares currently trade on relatively low valuations.

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In fact, the FTSE 100 itself has a yield of over 4%. It is possible to buy a range of companies that offer yields in excess of 5%, which could lead to a portfolio yield of around 6% from a diverse range of businesses.

Since this is around three times the current rate of inflation, and only slightly behind the high-single-digit annual total returns offered by the FTSE 100 over the long run, it suggests that the returns from large-cap dividend shares could prove to be high. In other words, it would not require them to post a significant amount of capital gains in order to outperform the index’s long-term average growth rate.

Income potential

For many people of working age, investing in dividend shares may not seem to be a sound move. After all, they have historically been popular among investors who have been seeking to generate a passive income from their portfolio. Therefore, they may choose to focus on cyclical companies that offer the potential for higher earnings growth.

However, dividend-paying shares could prove to be a better investment in the long run. In many cases, they offer financial stability, since their payment of a growing dividend may provide guidance for investors as to their financial strength.

Moreover, with interest rates expected to stay at low levels over the medium term, dividend shares may become increasingly popular among a variety of investors who are seeking to generate an income on their capital. Higher demand for dividend shares could mean that their market valuations move higher over the coming years.

Outperformance prospects

As well as a high yield, dividend shares can prove to be relatively defensive. In many cases, high-yielding stocks are mature businesses that do not require a significant amount of reinvestment, and that may be better shielded from economic uncertainty. Since the world economy currently faces a variety of risks, such as a global trade war, dividend stocks could offer outperformance of the wider FTSE 100 over the near term.

Therefore, now could prove to be a worthwhile time to buy a range of income stocks. They could help to bring your retirement date a step closer.