If you’ve hit age 50 and don’t have any retirement savings, then you might be understandably worried. The good news is it’s not too late to turn things around and build a passive income to help fund your retirement.
At this age, I’d focus on dividend stocks, not growth stocks. To enjoy big gains from growth stocks, you often have to sit tight for years, during which you may not receive any income. This isn’t ideal in retirement.
By contrast, dividend stocks provide regular income and much greater protection from market crashes — most of the time, dividends are paid reliably, even during bear markets.
Stock 1: A ‘boring’ 6.5% yield
After years of poor performance, the Royal Bank of Scotland Group (LSE: RBS) share price seems to be on the up again. Will it be another false dawn, or will new boss Alison Rose deliver the sustainable profits investors have been waiting for?
I don’t know the answer for sure, but my view is that 10 years after the financial crisis, banks are finally ready to move on. Over the last couple of years, most of the legacy and misconduct issues faced by RBS have been resolved. The last big problem was PPI, but although final claims were higher than expected, this book is now closed.
The bank’s underlying performance has also been improving. Underlying return on tangible equity — a measure of profitability — rose to 7.5% during the first half of 2019, compared to 5.3% in 2018. Although 7.5% remains well short of the bank’s 12% target, things seem to be moving in the right direction.
The RBS share price has already risen by more than 25% since hitting a low of 182p last August. But at the last-seen level of about 230p, the shares still trade at a 20% discount to their tangible book value of 290p. If profitability continues to improve, I’d expect this discount to close, lifting the stock towards the 300p level.
Broker forecasts suggest the shares will provide a dividend yield of 6.5% this year. This payout looks affordable to me. I rate the shares as an income buy at current levels.
Stock 2: An unloved cash machine
Investors have been predicting the decline of tobacco stocks such as British American Tobacco (LSE: BATS) for at least 20 years. But so far these gloomy predictions have been proved wrong.
Although global smoking rates are falling, a number of big mergers have taken place to enable companies to protect the big economies of scale they enjoy. BAT has been at the heart of this process. In 2017, the UK group spent $49.4bn to buy the remaining 58% of Camel owner Reynolds American that it didn’t already own.
This monster deal resulted in a pretty big debt hangover. But the BAT share price has started to recover over the last year. Trading remains stable and the group generated an operating margin of 38% last year.
It also generates a lot of surplus cash. BAT’s latest trading update confirmed debt reduction was “in line with our guidance” and predicted that revenue growth for 2019 would be 3-5%.
My analysis of the firm’s accounts suggests the 6% dividend yield should be fairly safe. Although some investors have ethical objections to tobacco stocks, I think it’s hard to deny the appeal of this business as an income investment.
