The prospect of retiring early appeals to a lot of people. But the one thing that can put them off turning the dream into a reality is how to turn their current financial resources into the sort 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 hopefully help me retire early in future.
Cheap FTSE 100 shares
Even looking in the top flight FTSE 100 index, some of the blue-chip companies in it trade for a low multiple of their earnings.
Take my investment in Legal & General, itself an expert in the pension field. It is trading on a price-to-earnings (P/E) ratio of around just six. That makes it look dirt cheap to me.
But with its well-known brand, large customer base and proven business model, Legal & General is a highly profitable business. I expect it to stay that way, although I am alert to risks like weak investor confidence that could hurt business volumes and therefore profits.
Not only does this FTSE 100 stalwart look cheap, it also offers a very tasty dividend yield. Currently the yield is around 8.5%.
Compounding dividends
If I invested £100,000 in shares yielding 8.5% and reinvested those dividends (something known as compounding), how much would I have after 25 years?
The answer may seem surprising. With that modest sounding 8.5% compounding, after a quarter of a century my initial £100,000 stake would have turned into a holding worth over £700,000 and generating around £60,000 annually in dividends.
That could help me retire early, I reckon.
This example presumes a constant share price and dividend. In practice both could up or go down. At the moment, Legal & General’s goal is to raise its dividend per share annually by around 5%, another thing that attracts me to the share.
Multiple great companies on sale
I would not want to tie my financial fortunes too strongly to those of a single company, though, no matter how attractive I thought it was.
Fortunately, I think there are other great bargains in the FTSE 100 index right now.
British American Tobacco and Vodafone are among the other FTSE shares I own that, like Legal & General, combine what I regard as a cheap valuation with a dividend yield above 8%.
Sometimes shares are cheap for a reason. Perhaps investors are concerned about the cost of paying down debt, for example. British American and Vodafone both have a lot of it. Or the City might doubt whether future earnings can stay at strong as the current performance.
So I am careful when buying shares to do my research and try to find real bargains not value traps. I think today’s market offers me an excellent opportunity to do so!
The post Buying cheap FTSE shares today could help me retire early. Here’s how! appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco P.l.c., Legal & General Group Plc, and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c. and Vodafone Group Public. 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.
