The thought of incomes cash — from doing little or no — sounds interesting to me. That’s why I prefer to put money into dividend shares.

Sadly, I didn’t begin early sufficient in life. With the good thing about hindsight, I ought to’ve put all my spare money into shopping for shares and holding them for the long run. After all, life is for residing, so a stability must be struck between saving and spending. Nonetheless, even in my youthful days, I reckon I might have discovered £100 a month to take a position.

However I consider the important thing to constructing vital wealth is to reinvest any dividends obtained into shopping for extra shares. This is called compounding.

So if I used to be beginning my investing journey another time, what might I hope to realize over a interval of 40 years?

Massive yields

In my view, the secret’s to search out shares which are prone to pay higher-than-average dividends for a sustained time period.

Personally, I’d deal with the FTSE 100. This index includes the UK’s greatest firms, which suggests — in principle — their earnings (and due to this fact their returns to shareholders) needs to be probably the most dependable.

I’ve chosen three as an example the potential returns that might be generated.

The holy trinity?

BP (LSE:BP) is presently paying a quarterly dividend of 8 cents (6.14p) a share. This offers a present yield of 6.1%. In money phrases, the oil big’s dividend is far decrease than it was. But it surely was reduce as a part of its plans to make it extra “resilient”. For instance, in 2019 it was paying a minimum of 8p each three months. However this implies there’s presently loads of headroom ought to the oil or fuel price fall. Throughout the second quarter of 2024, the group reported working money inflows of $8.1bn. No marvel its former boss described it as “literally a cash machine”. In the identical interval, its dividend price $2.6bn (32%). It’s necessary to keep in mind that BP’s payout is asserted in {dollars} so the precise quantity obtained is influenced by the speed of trade.

Nationwide Grid is aiming to extend its dividend in keeping with the Customers Costs Index, which is presently 2.6%. Throughout the yr ended 31 March 2024 (FY24), it paid 58.52p. Rising this in keeping with inflation would recommend a payout of 60p for FY25, equal to a present yield of 5.9%.

Regardless of the housing market slowdown, Taylor Wimpey has managed to extend its dividend throughout every of its previous 4 monetary years. This look set to proceed in 2024 with, in my view, a payout of 9.6p wanting probably. If I’m appropriate, this provides a present yield of 5.8%.

Doing the calculations

The typical of those three returns is 5.9%. 

Investing a sum of £100 a month for 40 years, yielding this quantity, would develop to £194,781. Not dangerous for a £48,000 funding. And keep in mind, this assumes no capital progress. At this level, I might then spend the dividend revenue of £11,297, as an alternative of reinvesting it.

However dividends are by no means assured and shares can go down in worth, so nothing could be taken as a right. And I’d should do extra research earlier than deciding whether or not I can buy any of those three shares.

Nonetheless, this theoretical train does illustrate the potential advantages of beginning early and taking a long-term view.