I want to retire early. Here’s how a market crash could help me do just that

James Reynolds — Mon, 21 Mar 2022 10:51:22 +0000

The word ‘crash’ frequently conjures up feelings of terror in investors. However, I believe that a stock market meltdown may provide a once-in-a-lifetime opportunity to assist me in boosting my investment results. It could even allow me to retire sooner. Here’s how.

Building a share portfolio for retirement

Accumulating a portfolio of stocks and bonds significantly increases my chances of building a retirement nest egg. Any capital I invest has the chance to grow exponentially over the next 10, 15 or 20 years. However, stock values can go up and down, and dividends are never guaranteed. This is why I’m spreading my retirement portfolio across a wide range of companies and industries.

Great companies on sale

Firstly, I’m concentrating on high-quality businesses. No small-cap start-ups for me. Larger firms may not grow as fast, but they are more stable. Plus, I have time on my side. Retirement is still decades away and with the longer-term view I have, the more I’m likely to benefit. So, in my retirement portfolio, I’d invest in a combination of long-established firms that offer good dividends, as well as growth stocks. In this example, I’ll concentrate on an income stock like British American Tobacco (LSE: BATS).

While stock values may be down during a crash, the underlying business remains more or less the same. Provided the company does not have a lot of debt and it can maintain (or even increase) sales during volatile times, then I don’t need to worry about investing in them. Warren Buffet would tell me to buy more shares!

Better dividend value

Let’s look at the March 2020 market meltdown as an example.

Shares in British American Tobacco currently trade for 3,162p and generate a staggering dividend yield of 10.28%. However, in March 2020, I could have purchased these identical shares for just over 2,500p. Not only would my portfolio have gone up in value by more than 20%, but the additional shares I would have been able to afford would now be earning me an insane yield.

It’s always good to remember that dividends are not fixed values. They can go up and down, or a company could choose to not pay one at all. But the difference of a few percentage points in yield can take years off of a retirement goal.

If I invested £1,000 at an annual compounding rate of 8.2% for 25 years, I would potentially receive £6,173 in dividends. It would take me 39 years to earn the same amount of dividend income from the same investment compounding at 5.2% yearly.

Using a market crash to my advantage

These numbers are only to illustrate a point.

However, the principal remains the same. Through buying when the market is down, I could move my retirement forward without changing anything else about my investments. My money might work considerably harder for me if I bought during a market crisis. I don’t try to time the market very often. However, if a market crisis results in high-quality enterprises trading at sale prices, I will fill my boots — and hope to be able to put my feet up sooner.

The post I want to retire early. Here’s how a market crash could help me do just that appeared first on The Twelfth Magpie.

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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.

Passive income: how I’m aiming to earn £400 a month in dividends

James Reynolds — Mon, 31 Jan 2022 11:41:34 +0000

Key points

Passive income can be achieved through dividend investing
High yields aren’t always sustainable
I’m building a diversified portfolio of UK-based companies

Passive income is money earned while we aren’t working. Building a consistent stream isn’t easy and takes years of dedication. But it’s not impossible. I could start a business, or rent out property. But neither of those options will start generating passive income right away and they also involve some extra work. The best way I know how to achieve my aim is with dividend investing.

Dividend investing

Dividends are payments made to shareholders from a company’s profits. These payments can be issued once, twice, or even four times a year, and they’re generally indicative of a company’s profitability. Dividend investing is a method by which investors construct a portfolio of dependable firms that provide a consistent dividend that can then be reinvested. This technique is quite popular in the UK, and we’ve witnessed record-high dividend yields in recent years. Some have even gone as high as 13% or 15% of a share’s value!

Yields and sustainability

These high rates, however, are typically unsustainable in the long run. For example, in 2019, mining firm Evraz paid 53p per share, representing a staggering 13.39% of the share price. But the company only paid 42p in 2017 and nothing in 2015 or 2016.

The average payout of big listed corporations in the UK is roughly 4%. This year BAE Systems and Unilever are scheduled to allocate 4.05% and 3.97%, respectively. But it’s important to understand that no firm is required to raise, retain, or even pay a dividend. The importance of consistency can’t be overstated.

Portfolio size

I figure I’ll need a total pool of £125,000 to meet my monthly objective of £400 in passive income. 4% of £125,000 is £5,000. That’s £416.60 if I split it over 12 months.

While I don’t have that kind of cash on hand, if I set aside £350 every month, I’ll be able to attain that magical figure in roughly 30 years.

Granted, 30 years is a long time, but if I start investing that money immediately, compound interest will help me get there sooner. Now all I have to do is pick a few businesses in which to invest.

My preferred companies

While the goal is to seek out secure organisations I can trust, I believe it’s worthwhile to take a few chances in order to accelerate my pot’s growth. I’ve already written about Imperial Brands. Since 2002, the tobacco firm has issued a substantial dividend to its stockholders at least twice a year. Today’s yield is a fantastic 8%.

I’m not overly concerned if it decides to reduce its dividend payout because my plan’s benchmark is 4% over 30 years. Anything over that is a bonus. However, I believe it’s critical that I don’t rely only on this technique and instead diversify my portfolio with smaller-yield firms.

Lloyds Bank pays a dividend of roughly 2.37%, lower than my target return, but banks are generally stable businesses. Finally, I’d go with Unilever as it’s a huge, prosperous firm that now pays almost 4%.

None of this is guaranteed though. Investing always entails risk. The essential thing for me to do in that case is to diversify my portfolio so that I can weather any storms and build towards my passive income dream.

The post Passive income: how I’m aiming to earn £400 a month in dividends appeared first on The Twelfth Magpie.