You might think that retiring by 50 is too much of a push. In truth, it mainly depends on what age you’re starting from, and how much you can look to invest on a regular basis. Basing it on someone aged 30, investing £1,000 a month, it isn’t as much of a stretch as you might think. The key element is picking structurally sound FTSE 100 firms to invest in, and making sure you reinvest the passive income you receive from the dividends. Let’s take a look in more detail.
Investing in strong FTSE 100 firms
When I talk about investing for early retirement, I need to buy into firms that’ll be around for decades to come. With around 20 years as my investment timeframe, I want to ensure that any investments are sound in the long term. So I’d be staying away from FTSE 100 stocks that look vulnerable to the impact of Covid-19. The past six months has given me good data to be able to see this clearly. If the pandemic has really hurt a business, it’s unlikely to continue to pay out a dividend. The cash flow will have to be retained within the business to strengthen the balance sheet.
In order for me to pick up passive income from dividend investing, I need to focus more on resilient sectors. Good examples here are some firms within financial services. I recently wrote about the positive stance I have on Schroders,the asset manager. It currently offers a dividend yield of over 5%.
Another sector I’d look to is consumer staples, such as supermarkets. Morrisons currently has a dividend yield of 4.18%. The consumer need for the goods offered by the supermarket should ensure revenue (and thus cash flow) remains strong into the future.
Dividend reinvestment to boost income
Let’s say I manage to invest £1,000 a month with an average dividend yield of 5%. If we assume that I can reinvest all of my dividends at the same yield (5%), then I can make my money work even harder. This is because passive income from dividends can be used to generate even more passive income over time by reinvesting it.
Looking at the bigger picture, investing £1,000 a month with a 5% dividend yield will give me a pot of just under £400,000 for my retirement at the end of the 20 years. Regardless of your plans for life past 50, this will certainly go a long way to helping to achieve them! The main element that boosts the return is both the reinvestment of dividends but also the regularity of investing. Putting some money away each month is easier to budget for rather than trying to invest £12,000 once a year.
By meeting certain parameters, I can look to retire by 50 from using the passive income from dividend investing. I need to pick sound stocks that are robust enough to see out the pandemic, and make sure I reinvest the dividend payouts.
The post Can I retire by 50 using the passive income from FTSE 100 dividend investing? appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). 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 2020