I’ll begin receiving my State Pension when I’m 67. But it won’t be enough for me to live in comfort. So since the age of 20, I’ve been making regular monthly contributions towards building a second pot of money. And I’ll draw on that in retirement to boost my income alongside the state provision.
Over the years, my monthly contributions have always been sent to tax-efficient investment vehicles. To begin with, I invested in my employer’s pension scheme. Then into personal pension schemes that put the money into managed funds. And now into a Self-Invested Personal Pension (SIPP) and into a Stocks and Shares ISA.
The theme underlying all those investment ‘wrappers’ is stocks and shares. To begin with, fund managers invested in company shares and I invested in the funds within my pension scheme. But there was little choice about which funds received my money. However, now with the SIPP and the ISA, I’m in complete control. I’m the manager of my own fund and make all the investment decisions. And I like that much better.
Guided by dividends
I’m using three ways to aim to keep the investment pot growing. Firstly, a focus on shareholder dividends. And because I’m in the building stage of my retirement pot, I roll all that cash back into my investments to help the process of compounding.
Successful investor Lord John Lee focuses on dividends as well. In his book How to Make A Million — Slowly, he told us that when he first invests in a stock it’s his main consideration. And he reckons we can tell much about the state of a business by examining the directors’ decisions regarding dividends — have they raised them, held them steady, cut them? It’s all good information to help my investment decisions regarding the company’s stock.
And well-known fund manager Neil Woodford sailed through the successful period of his fund management career by focusing on dividends. He used to look for opportunities based on how consistent a company had been with regard to paying shareholder dividends. And also how much the dividend was growing each year.
Going for growth
Secondly, I look for growth. If a company is expanding its operations profitably, it could make a decent investment. I look for a record of multi-year increases in revenue, earnings, cash flow and, of course, the shareholder dividend. And to find businesses in the growth stage, my search often takes me to the smaller constituents of the FTSE 100 index.
I also hunt for opportunities in the FTSE 250 index and in the London small-cap indices. Some investors are wary of smaller companies because they perceive them as carrying more risk. But all shares have the potential to make poor investments, even those big-caps in the FTSE 100.
My view is smaller firms can make sound investments as long as I research them thoroughly and choose stocks carefully. Although, even then, a positive investment outcome isn’t guaranteed.
Thirdly, I’m aiming to boost my retirement income by investing in shares and funds beyond the London market. For example, I have investments backed by US stocks and companies from emerging markets around the world.
If I was starting to invest today, I'd begin here...
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.