Why cheap dividend shares could help you retire early in this market rally

Dividend shares could become increasingly popular among income-seeking investors in coming years. Low-interest rates may see shares offer the most attractive return profile among mainstream income-producing assets.

Therefore, buying a selection of cheap shares now which offer dividends could be a sound move. Although the recent market crash may or may not be over yet, the prospect of a long-term market rally may mean that shares offer strong capital returns in the coming years, helping you to retire early.

Low-interest rates

The uncertain outlook for the world economy could mean interest rates experience a prolonged period at low levels. This may help to support the economy while it faces an unprecedented crisis. But it also leaves income-seeking investors with a lack of choice in generating a return from their capital.

For example, mainstream income-producing assets such as cash and bonds may become relatively unpopular. They may fail to offer an inflation-beating return over the next few years. This could increase the demand for dividends with many companies now presenting relatively high yields following the market crash.

Certainly, there is scope for dividends to be cut across many sectors where sales and profitability are under pressure. But a number of companies and industries have reported solid financial performances of late. As such, their shares may experience increasing demand from investors. This is especially true if they are able to increase dividends at an above-inflation pace.

This could lead to a rise in share price to complement attractive income returns over the long run. It could also boost your portfolio returns.

Share market recovery

The share market’s long-term prospects appear to be relatively bright despite a sustained recovery seeming unlikely at the present time. This is due to the potential risk of a second coronavirus wave later in the year and geopolitical challenges concerning the US and China.

However, share market recoveries seemed unlikely during the previous crisis. And while they can sometimes take years to materialise, long-term investors building a retirement nest egg are likely to have sufficient time to benefit from them. As such, equities appear to offer the most obvious means of generating an attractive total return over the long run.

Increasing popularity of dividend shares

Dividend shares could be relatively popular during a market recovery. This is not only for their income prospects but because a growing dividend suggests financial strength and confidence among a company’s management regarding growth potential. Investors may view a company with the financial strength to maintain its growing dividend in a more positive light, relative to its peers.

This may increase demand for its shares and lead to a higher share price, which boosts your chances of retiring early.

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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.

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