Buying dividend shares today could be a sound means of obtaining a growing passive income over the long run. In many cases, they offer high yields after having not fully recovered from the 2020 stock market crash. And, with the global economic outlook set to improve, they may deliver rising dividends over the coming years.
Therefore, even if an investor has no savings at age 50, there may be time for them to build a worthwhile passive income between now and when they retire.
Buying dividend shares with high yields
High yields among many of today’s dividend shares do not only mean that they offer a generous passive income in the short run. A high yield also suggests that they may be priced at levels that do not fully factor in their long-term financial prospects.
For example, some consumer goods companies and energy stocks have high yields at the present time compared to their historic averages. This could be because they face difficult short-term outlooks that may dampen their financial prospects.
However, in many cases, such companies have solid financial positions and the right strategies to adapt to changing consumer tastes. This could mean that they can deliver impressive financial performances over the long run that translate into rising share prices.
Buying dividend stocks with growth potential
As well as focusing on dividend stocks with high yields, buying companies with growth potential could be a sound move. Businesses that are likely to benefit from industry-wide trends, such as an increasing shift towards a digital world, may be able to deliver stronger sales and profit growth than their peers.
This may have a positive impact on their valuations over the long run. It may also enable them to pay a rising dividend that increases their popularity among investors in an era of low interest rates.
A rising dividend may also significantly improve an investor’s level of passive income over the long run. Compounding can mean that an above-average dividend growth rate turns a modest yield today into a very attractive level of income in the coming years.
Building a retirement portfolio
Even though dividend stocks could provide strong returns over the coming years, even an investment in a diverse range of shares that matches the market’s return can produce a surprisingly large portfolio.
An investor who is aged 50 with no savings is likely to have at least 15 years left until they retire. In this time, a similar growth rate to the stock market’s historic return of 8% would turn a $750 monthly investment into a portfolio valued at $260,000.
However, through buying high-yielding stocks with dividend growth potential, it is possible to outperform the market. Doing so could provide greater financial freedom in retirement.
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.