Building a retirement fund is one reason behind many long-term investors’ efforts, but as you get towards taking retirement itself, those final few years are crunch time as you look for maximum value from your portfolio.
One option is to invest in dividend shares as part of a broad portfolio – as always, it makes sense to diversify your investments across a number of different areas to reduce your exposure to isolated risks.
But strong dividend shares can be a source of income, which you can either use to fund your retirement, or reinvest to compound your gains.
What is a dividend share?
A dividend share or dividend-paying stock is an investment that promises to pay you a portion of the company’s profits, typically on an annual basis.
Regular cash dividends are paid out to shareholders once any preferred stock dividends have been paid.
The exact amount you receive will depend on the company’s performance during the preceding financial accounting period, so in a strong market or a rising economy, dividend payouts can be substantial.
It is also possible to receive special dividends or one-time dividends, although this is relatively uncommon.
In those cases, shareholders are given a one-off dividend usually because of a specific win for the business, ranging from liquidating substantial assets or selling off a division, to a big win in court.
Think big to invest in dividend shares
Although individual performance will vary, generally speaking the bigger shares are the better options when investing in dividend shares.
Long-term strong performers like BP have made annualised returns of over 8% in the past five years, and analysts claim the oil giant’s current share price is below estimate.
Pharma is another sector that often promises good returns, and again stocks like GlaxoSmithKline are currently trading below their expected value despite strong company performance.
How long to hold
If you are in your final few years before retirement, you might be looking to make some faster trades, but holding on to these big-ticket shares can allow you to benefit from their longer-term positive performance.
You can complement this with some short-term trades if you wish, as well as investing in multiple markets around the world both as a hedge against economic shocks on a national scale, and also to insulate against or even capitalise on fluctuations in exchange rates.
If you are able to reinvest your dividends during that time, this can also build your portfolio further as part of a positive feedback loop – and those newly acquired shares can pay even more dividends in the future.
Building a portfolio of dividend shares takes time. The best performing stocks are worth holding on to and reinvesting adds organic growth to your holdings.
Once your portfolio is well established though, those incremental gains can add up to substantial payouts on an annual basis.
Even just a few cents or pence per share can be significant when you have a portfolio numbering in the thousands.
As a result, strong dividend shares can effectively form the equivalent of a pension annuity, dropping a lump sum of disposable income into your bank account each time another AGM comes around.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.