The National Lottery might seem like an easy way to make a life-changing sum of money, but did you know that the odds of winning the jackpot are more than 40m to one?
This suggests you are more likely to become Prime Minister than win in this game of chance. With that in mind, FTSE 100 dividend stocks are a much better way to grow your wealth over time.
Unlike the National Lottery, which is gambling, FTSE 100 dividend stocks have the potential to provide you with a steady, growing, passive income stream for life that could help you retire early.
Buying the FTSE 100
The FTSE 100 may have delivered impressive returns over the past 12 months, but there are still plenty of companies in the index that offer attractive dividend yields.
Around 30% of the index’s constituents offer dividend yields of more than 5%, significantly above the rate of interest most savers would be able to achieve from high street banks.
Overall, the index currently supports an average dividend yield of 4.3%. That’s what you would get if you were to buy a low-cost FTSE 100 tracker fund.
As noted above, some stocks offer a higher level of income, and many also trade at a discount to their historical averages. This may mean they could generate capital growth as well as income over the long term.
Through a combination of income and capital growth, the FTSE 100 has produced an average annual return for investors of 9% since inception. This rate of return is enough to grow even small sums into a substantial nest egg.
For example, if a saver aged 30 started saving into the FTSE 100 today with a monthly deposit of £300, by the time they reach the state pension age of 65 they would have accumulated a total savings pot of £890,000. That suggests a potential annual income of £38,270 if the money was invested in the FTSE 100 fund.
If this nest egg was invested in FTSE 100 stocks with dividend yields of more than 5%, a saver could generate a total annual income of £44,500.
The one big difference between the National Lottery and investing in the FTSE 100 is the fact that, as the National Lottery is classed as gambling, winnings are tax-free. The same is not true of the FTSE 100. This could be a big issue for savers now that the annual dividend tax-free allowance has dropped to just £2,000.
One way to make sure that you don’t have to hand a large chunk of your earnings over to the taxman is to use a Stocks and Shares ISA. These investment wrappers are very tax efficient.
There’s no further income tax or capital gains tax to pay on profits earned inside a Stocks and Shares ISA.
Therefore, if you want to retire early, avoiding the National Lottery and investing in the FTSE 100 via a Stocks and Shares ISA could significantly increase your chances of doing so.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020