Why I’d stop saving and start buying dividend stocks today to retire early

The COVID-19 stock market crash may have lowered the appeal of dividend stocks for some investors. They may be concerned about a second downturn this year, or feel that having larger amounts of cash is beneficial in a challenging economic period.

However, low interest rates mean that saving money could lead to disappointing returns in the long run. At the same time, high yields and the potential for dividend growth could lift stock prices higher. Over time, income shares could help to bring your retirement date a step closer.

Low interest rates on cash savings

Dividend stocks currently offer a higher return than cash savings. This is partly due to low interest rates that have been around for a number of years. However, the prospect of rising interest rates now seems to be somewhat more distant than it was at the start of the year. A weak global economic outlook means that policymakers may retain an accommodative monetary policy over the medium term. This could lead to continued low returns from cash savings.

Saving money may even lead to a negative return once inflation is factored in. This could be very detrimental to your retirement prospects. It could even lead to a loss of spending power if inflation rises and interest rates remain low. This would make it more difficult for anyone with cash savings to retire early.

Return prospects from dividend stocks

While dividend stocks may have produced poor returns this year, their low valuations suggest that they offer impressive long-term prospects. Weak investor sentiment and an uncertain economic environment mean that some income shares have a potent combination of a high yield and a low valuation. This could lead to impressive total returns that improve your long-term financial prospects.

Although there are ongoing risks to the stock market’s near-term performance, its track record is exceptionally strong. It has always recovered from every previous downturn to post new record highs. As such, investing in a range of income shares today could provide you with the opportunity to obtain a worthwhile passive income now, as well as make capital gains on your investment over the coming years.

Dividend growth opportunities

While many dividend stocks may not increase their shareholder payouts this year, history suggests that they are likely to do so as the economy recovers. Following previous economic difficulties, such as the global financial crisis, dividend growth was relatively slow in some industries. However, as trading conditions pick up and economic growth strengthens, dividends have often followed suit.

This outcome may seem unlikely right now, but rising dividends are set to feature in the subsequent period of economic recovery. This could further improve your return prospects and increase your chances of building a nest egg that brings retirement a step closer.

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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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