Retirement savings: dividend shares offer the fastest route to one million


With monetary policy in a variety of economies around the world having been lax in the last decade, dividend stocks have provided an obvious route to investor income. Rates of cash savings and bond yields have been low, which means that many investors have relied on income-producing stocks to generate passive income.

As a result of this higher demand, however, the stock of dividends also generated an improvement in capital returns in many cases. This despite an increase in interest rates in several major economies in recent years, especially in the US.

That is why dividend stocks may still offer investors the chance to generate a seven-figure nest until retirement, with the potential for total return on offer being high.

Dovish monetary policy

While interest rates in the US and other major economies may increase in the medium term, the pace of their rise may be relatively slow. There are fears about the performance of the US economy, with recent economic data on retail sales and job growth being weaker than expected.

This may suggest that the increase in interest rates in recent years is beginning to negatively impact the rate of growth. Thus, the Federal Reserve may adopt a more dovish stance on monetary policy that will cause interest rates to remain below expected in the medium term.

In addition, the Chinese economy is experiencing a slowdown, while other risks, such as Brexit, and the prospect of a trade war remain on the horizon. Together, these risks may persuade policymakers to postpone raising interest rates, raising fears about the potential for tighter monetary policy to reduce economic growth.

Increasing Feature

The impact of a slower than expected increase in interest rates on dividend stocks may be positive. Other income-generating assets, such as bonds and cash, may continue to offer relatively low yields at a time when many of the major global stock markets are still trading below their 2018 highs. This may indicate that stocks are cost- benefit ratio, and it is possible to generate a relatively high income return from dividend payers.

While growth stocks may also become increasingly attractive if interest rates do not rise materially, they may be held back by investors' weaker sentiment. Investors may become increasingly wary of the above-mentioned risks facing the world economy and may decide they would rather buy lower-risk dividend shares.

So while no class of assets increases in perpetuity, the stock of dividends seems to have some way to go before it reaches its peak. From an income perspective, they appear to be highly attractive compared to other asset classes. Meanwhile, the perception of lower risk versus growth actions that may be more cyclical may mean they get higher valuations in the coming years as the risks faced by the world economy increase.

As such, now may be the right time to add a variety of dividend shares to a portfolio, with them having the potential to generate a large, and even seven-digit, nest for retirement.

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