Despite the recent impressive gains in the equity markets, most investors are still nervous about the choppiness in share prices. However, if your aim is to save for retirement years, then you do not need to be too worried about the short-term headlines in the markets. Instead you may want to invest regularly in solid companies with stable cash flows that also pay dividends.
Such a passive dividend income strategy would help build a valuable retirement portfolio to secure your future.
Dividends are attractive
Interest rates are at a record low. Generating passive income via dividend stocks becomes especially attractive in such a macroeconomic environment. And regular investing in dividend shares enables investors to create serious wealth over the long term.
With passive income yielding businesses, investors get the potential to have both capital gains and obtain residual payouts to bolster their position.
During market downturns, dividends can also help investors ride out the storm better. Although the volatility in the markets may be unnerving, most stocks are a lot cheaper than they were at the start of the year. Put another way, the recent sell-off is a good time to invest in top-quality dividend stocks and build your nest egg for retirement years.
So, how do you decide where to invest?
Defensive stocks may be a safe bet
Each portfolio has a different investment style and risk/return profile. When equity markets become volatile, many investors tend to go for defensive stocks. Such businesses tend to be less prone to macroeconomic and credit cycles than others. And the FTSE 100 offers a number of names that could be appropriate for most portfolios.
If you love stable dividend shares, then a utility group like Severn Trent deserves your attention. As one of the largest water companies, it serves over eight million customers.
Needless to say, demand for services like water or electricity are eternal, whatever the economic reality is. And the company’s share price can be testament to that fact. So far in the year, the stock price is almost flat, hovering at 2,479p. That means a dividend yield of 4.1%. The shares are expected to go ex-dividend this week on 11 June.
My second pick is pharma giant GlaxoSmithKline. Year-to-date, this FTSE 100 bellwether is down about 7%. The current price of 1,637p supports a dividend yield of 4.9%. The shares are expected to go ex-dividend next in early August. You may be interested to know that the payouts are made quarterly.
The group offers a robust secular business as three segments, i.e., pharmaceuticals, vaccines, and consumer healthcare, contribute to revenues. The firm has also been in the news in recent weeks as GSK and French healthcare giant Sanofi have joined forces to work on a vaccine against the coronavirus. I’d buy the dips.
Reinvesting dividends to secure your retirement
If you invest £1,000 each in these two companies, you can generate around £90 in annual dividends. And that is on top of any potential increase in share price. While it is tempting to take out this passive income yearly and spend it, I’d argue that it is important to reinvest dividends and delay withdrawals.
Seasoned investors regard compounding as the eighth wonder of the world. An annual return of 5% might not mean a lot today. But over 25 years, it will help accelerate your retirement pot greatly.
