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We all know the importance of saving and investing for later life. But once you’ve built your nest egg — possibly through a combination of growth and dividend shares — what’s the best way to put this to work to generate a solid retirement income?
There’s no right and wrong answer to this. Some people like the security of a guaranteed income that annuity products provide. Other people like to draw down a set percentage of their portfolio each year.
My preferred option, which I plan to use myself when I retire, is to invest my retirement fund in dividend shares. It can, on one hand, be a risky strategy as dividends are never guaranteed. However, this method can realistically deliver a reliable second income as well as sustained portfolio growth.
By spreading money across different types of investments, I can mitigate the risk from any single investment and aim to secure a large and consistent passive income.
To build my portfolio up for retirement, I’m purchasing a wide mix of shares, investment trusts, and exchange-traded funds (ETFs) that span different regions and industries.
I’ve also tailored my portfolio to include growth, value, and dividend shares. This way, I can target healthy capital gains and dividend income over time, as well as a smooth return across the economic cycle.
With this strategy, I’m aiming to achieve at least an 8% average annual return. Over 30 years, this sort of return would turn a £500 monthly investment into a portfolio worth £745,180.
If I then decide to invest this in 6%-yielding dividend stocks, I could earn an annual passive income of £44,711.
As I say, dividends are never guaranteed. But a diversified portfolio can provide a cushion against any volatility and provide robust retirement earnings.
Here’s an example of what this could look like for a retiree today:
Stock
Sector
Forward dividend yield
Aviva (LSE:AV.)
Financial services
5.7%
STS Global Income & Growth Trust
Investment trust
3.4%
Invesco FTSE Emerging Markets High
Dividend Low Volatility ETF
Exchange-traded fund (ETFs)
5.8%
Supermarket Income REIT
Real estate investment trust
7.9%
Unilever
Consumer goods
3.3%
Bluefield Solar Income
Renewable energy
9.6%
M&G
Financial services
7.7%
Pennon Group
Utilities
6.3%
Murray International Trust
Investment trust
4.4%
TBC Bank
Banking
5.4%
This portfolio — which has an average forward yield of 6%, bang on my target — comprises UK stocks with strong histories of paying large and growing dividends. What’s more, with three investment trusts and ETFs in there, it achieves wide diversification by providing exposure to 289 companies from across the globe.
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Aviva is one share I already own and plan to hold through my retirement. A giant in the financial services industry, it has formidable cash flows that allow it to pay large and consistent dividends over time. Furthermore, with expertise across multiple product lines — including life and general insurance, pensions, and savings — it’s in better shape to weather profits shocks in one or two segments and deliver a dependable income.
One drawback is its narrow geographic footprint. By focusing just on the UK, Ireland, and Canada, it is more exposed to concentrated geographical risk than operators with global operations.
But as part of a diversified portfolio, I think Aviva shares could prove a winner for me.
The post Here’s one way you could target a £44,711 retirement income with dividend shares appeared first on The Motley Fool UK.
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Royston Wild has positions in Aviva Plc. The Motley Fool UK has recommended M&g Plc, Pennon Group Plc, and Unilever. 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.
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