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The prospect of retiring early appeals to many people. But the only thing that can deter them from turning the dream into a reality is how to convert their current financial resources into the kind of amount that could help fund their retirement. Some FTSE shares look so cheap to me at the moment that I think investing enough money in them today could help me retire early in the future.
Cheap FTSE 100 shares
Even looking in the top category FTSE 100 index, some of the blue-chip companies that comprise it trade for a low multiple of their earnings.
Take my investment in Legal and general, an expert in the field of pensions. It trades on a price-to-earnings (P/E) ratio of around just six. That makes me look very cheap.
But with its recognized brand, large client base and proven business model, Legal & General is a highly profitable business. I hope this continues, although I am alert to risks such as weak investor confidence, which could hurt business volumes and therefore profits.
This FTSE 100 stalwart not only looks cheap, but also offers a very attractive dividend yield. Currently the yield is around 8.5%.
Compound Dividends
If you invested £100,000 in shares yielding 8.5% and reinvested those dividends (known as compounding), how much would you have after 25 years?
The answer may seem surprising. At that modest-sounding capitalization of 8.5%, after a quarter of a century my initial £100,000 holding would have become a holding worth more than £700,000 and generating around £60,000 a year in dividends.
I guess that could help me retire early.
This example assumes a constant stock price and dividend. In practice, both could go up or down. At the moment, Legal & General’s goal is to increase its dividend per share annually by around 5%, another thing that attracts me to the stock.
Several large companies for sale
However, I would not want to tie my financial fortunes too much to that of a single company, no matter how attractive it seemed to me.
Fortunately, I think there are other great bargains in the FTSE 100 index at the moment.
British American Tobacco and Vodafone They are among the other FTSE shares I own which, like Legal & General, combine what I consider to be a cheap valuation with a dividend yield of over 8%.
Sometimes stocks are cheap for a reason. Perhaps investors are worried about the cost of paying down debt, for example. Both British American and Vodafone have a lot of it. Or the City might doubt that future profits can remain strong as current performance.
That’s why I’m careful when buying stocks, I do my research and try to find real bargains, not value traps. I think the current market offers me an excellent opportunity to do so!
