Can investing in the stock market – even in boring-seeming shares, not hot growth darlings – really help somebody improve their finances to the point where they can retire early?
Yes, it can.
Of course, in practice it will depend on how much money they need to retire early – and how much they can invest.
Today’s investment can help fund future plans
As an example, I will use the industry group Pensions UK’s ‘Retirement Living Standards’.
For one person outside London, the standards suggest a moderate retirement costs £32,700 per year. That will likely rise in future, but I will stick to it for this example.
How large a stock market portfolio is needed to generate £32,700 per year in income (in the form of dividends) will depend on the dividend yield achieved by the portfolio.
At a 3.1% yield (the current FTSE 100 average), it would take £1.1m. At a 5% yield, that would fall to £654k. At a 7% yield, the number is £467k.
Setting realistic goals
A 7% yield target is ambitious. But in today’s market I see it as a plausible goal even while sticking to proven, well-known businesses.
Putting that £467k straight into a share-dealing account could be one way to do this.
But most people do not have that sort of cash on hand. Building up over time could be the way to go in that case. From a standing start, investing £20k a year into a Stocks and Shares ISA and compounding it at 7% a year, it would take 15 years to hit the target.
That would allow a 35-year-old to retire early. In fact, it would still enable a 45-year-old to retire before the State Pension age. Or even a 50-year-old, by a few years at least.
One share to consider
Compounding at 7% annually is one thing. Earning that as a dividend yield (without any capital growth included, as it can be for compound annual growth) is another, though that is a bridge that may not need to be crossed for 15 years.
So, more immediately, what sort of shares might be worth considering for the prospect of share price growth and dividend income?
One is homewares retailer Dunelm (LSE: DNLM).
To start with the income opportunity first, the share yields a juicy 5.6%. It also has a track record of paying special dividends on top of ordinary payouts when it has spare cash.
Past dividends are not necessarily a sign of what to expect in future. But with its large customer base, proven business model, and lots of unique products that can help differentiate it from rivals, I reckon Dunelm could keep generating substantial excess cash in years to come.
If the business does keep doing well, I think that could potentially boost its share price. It has fallen 46% in five years and is now 11 times earnings.
I see that as an attractive valuation for a healthy, profitable business like this.
One risk I see is any serious property market downturn hurting demand for home furnishings. That could damage revenues and profits at Dunelm.
Then again, it might actually boost sales if people decide to spruce up their existing homes.
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Christopher Ruane does not hold any positions in the companies mentioned.
