The State Pension will currently give you an income of just £8,546 a year, which is the bare minimum you need to survive in retirement. You can generate more from a balanced portfolio of stocks and shares, and the earlier you start building one the better.
Top stocks
Shares don’t just give you growth when stock markets rise, they can also generate income from the regular dividends top companies pay to investors. If you can build a portfolio of £150,000, you could currently generate income of nearly £10,000 a year. That will more than double your State Pension, and start to make retirement look appealing again. If the money is held within a Stocks and Shares ISA, that income is entirely free of tax as well.
These figures come courtesy of Lee Wild, head of equity strategy at Interactive Investor, who has recommended a portfolio of 10 stocks that would generate a whopping of 6.6% income a year, way more than you can get on cash.
You probably won’t want to replicate this portfolio perfectly, but it might give you a few ideas of stocks you can add to your existing one.
| Company | Yield | Sum | Yield | Income |
|
BP |
BP. |
£20,000 |
6.2% |
£1,239 |
|
Sainsbury’s |
SBRY |
£15,000 |
4.5% |
£679 |
|
HSBC |
HSBA |
£15,000 |
6.2% |
£929 |
|
Legal & General |
LGEN |
£10,000 |
6.4% |
£637 |
|
GlaxoSmithKline |
GSK |
£23,000 |
5.1% |
£1,179 |
|
Imperial Brands |
IMB |
£18,000 |
8.2% |
£1,472 |
|
Barratt Developments |
BDEV |
£11,200 |
7.9% |
£890 |
|
SSE |
SSE |
£8,200 |
8.3% |
£681 |
|
Renewables |
TRIG |
£15,000 |
5.5% |
£831 |
|
Vodafone |
VOD |
£16,000 |
9.6% |
£1,543 |
|
Total |
£151,400 |
|
£10,080 |
There are some incredible yields around right now, partly driven by recent share price underperformance. Vodafone offers a dizzying 9.6% a year, the third highest on the FTSE 100, although some question whether its dividend is sustainable due to the company’s high debt levels. SSE, Imperial Brands and Barratt Developments all yield around 8% a year, more than 10 times base rate.
The long game
Remember that dividends are not guaranteed and share prices are volatile in the short run, which is why you should be investing for the long term, at least five or 10 years, and preferably a lot longer than that.
This portfolio is big on blue-chips, none of which have cut its payout during the past four years. It can happen, though. Wilde was previously a fan of FTSE 250 housebuilder Galliford Try, but dumped it from his portfolio after Carillion’s collapse triggered a fundraise and 10% dividend cut.
He also dumped Marks & Spencer Group, even though it has sustained its yield, as savage conditions across the retail sector destroyed chances of a share price turnaround.
Capital idea
I was interested to see the portfolio contains Sainsbury’s, given the consumer spending squeeze and remorseless rise of budget rivals Aldi and Lidl. The stock has suffered as the Competition & Markets Authority appears to have put the kibosh on its Asda hook-up, but the yield is steady at 4.5% and it still could deliver income and growth.
Almost every name should be familiar, with the exception of Renewables Infrastructure Group, a close-ended investment trust listed on the FTSE 250 that invests in assets generating electricity from renewable sources. It aims to deliver long-term stable dividends, while preserving the capital value of its portfolio.
This look like a good jumping off point for your own portfolio. It also shows how shares can give you far more income than the State Pension will.
