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3 reasons why you can retire early with dividend stocks

Peter Stephens
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Dividend stocks offer much more than just a passive income. They provide long-term growth potential that could enable you to retire early.

A large proportion of the historic total returns of major stock market indices has been generated from the reinvestment of dividends. Since many income stocks currently trade on low valuations due to the uncertain prospects for the world economy, now could be the right time to add them to your retirement portfolio.

Capital growth

Although some stocks may be best known for offering generous dividends, they may be able to deliver surprisingly high capital returns. One reason for this could be a prolonged period of low interest rates that looks set to continue across developed economies. This may increase the appeal of dividend stocks among investors who are seeking to generate an income from their capital. The end result may be rising prices for dividend stocks.

Additionally, companies that can offer dividend growth may become increasingly popular among investors. A rising dividend can signify financial strength within a business that may lead to investors becoming increasingly optimistic about its long-term prospects. Rising demand may lead to share price gains for investors.

Dividend reinvestment

Income shares provide the opportunity for investors to benefit from the reinvestment of the dividends they receive. Certainly, spending dividends may be tempting. But reinvesting them has historically been one of the major contributors to the total returns of major stock market indexes.

Dividends provide a positive cash flow for investors during a range of market conditions. Investing them upon receipt can allow an investor to capitalise on lower stock prices during unstable periods for the world economy. This may strengthen their long-term capital growth potential, and provide a catalyst for their portfolio.

With many sharedealing providers offering a low-cost opportunity to automatically reinvest dividends, it could be a simple and highly profitable action to take.

Current opportunities

At the present time, many dividend shares appear to trade on appealing valuations. They may have been caused by an uncertain outlook for the world economy. Although this may lead to short-term challenges for investors, it could provide the opportunity to obtain relatively high yields that can deliver impressive total returns in the long run.

Assessing the financial strength of a business, and its ability to pay a growing dividend, could be key to successful income investing due to the current volatile outlook for the world economy. As such, it may be prudent to analyse factors such as the amount of headroom a company has when making its dividend payments, as well as its debt levels and interest cover.

Through buying high-quality dividend shares and reinvesting the income received, it may be possible to enhance your retirement prospects. Dividend stocks offer capital growth potential, as well as a healthy income return that may improve your long-term financial outlook.

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