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No savings at 40? I’d invest £500 a month to make a £20,000 passive income from dividend shares

Peter Stephens
·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

Making a generous passive income in retirement could be a realistic prospect for investors who buy UK dividend shares on a regular basis. In many cases, they offer good value for money at the present time. And they could become increasingly popular in a low-interest-rate environment.

As such, now could be the right time to start building a portfolio of income shares. Even an investor aged 40 with no retirement savings may be able to obtain a worthwhile nest egg in the long run with a modest monthly investment.

Increasing popularity of stocks offering passive income

The most obvious appeal of dividend shares at the moment is their passive income potential. In 2021, the prospects for interest rates are relatively uncertain. However, it appears unlikely at the present time that they will move significantly higher than their current 0.1% level by the end of the year. In fact, there is a reasonable chance that they will head into negative territory. This would be due to the impact of lockdown measures on the economy’s performance.

Therefore, income investors may be pushed from cash and bonds due to the low returns on offer. They may be pulled towards dividend stocks because of their high relative yields. For example, many FTSE 100 shares currently have yields that are in excess of 4% or even 5% at the present time. This may make them relatively attractive opportunities for passive-income-seeking investors. And this could lead to rising stock prices over the long run.

Growth opportunities among UK dividend shares

Furthermore, dividend shares provide an opportunity to make a growing passive income in the long run. The dividends paid by many FTSE 350 companies have fallen over the past year due to a weak economic outlook. However, the UK economy’s prospects will improve in the coming years. So it seems likely that dividends could grow at an above-inflation pace. This may further increase the appeal of dividend stocks. And it could lead to rising share prices that outperform the wider stock market.

Even buying dividend shares that only match the performance of the stock market, could mean a generous income return in the long run. For example, say an investor purchases £500 of shares per month and matches the FTSE 100’s annual historic total returns of 8%. They could have a nest egg valued at £630,000 by the time they reach the current retirement age of 68.

From this, a passive income of £25,000 could be drawn by spending 4% of the capital each year. This is similar to the average yield of the FTSE 100, and could provide a greater degree of financial freedom in retirement. As such, now could be the right time to start buying dividend shares regularly to achieve a more attractive financial outlook for retirement.

The post No savings at 40? I’d invest £500 a month to make a £20,000 passive income from dividend shares appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021