How I’d supplement my State Pension with £1,700 in passive income

Our writer doesn’t want to rely solely on the State Pension in retirement. Here’s his plan to generate passive income by investing in dividend stocks.

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The full new State Pension pays just over £800 per month. I think this alone won’t be enough to guarantee a comfortable retirement. All is not lost, however. I have a plan to boost my retirement pot by investing in dividend stocks to create additional passive income streams of £1,700, taking my grand total to £2,500 a month.

Here’s how I’d aim for a total of £30,000 a year in later life.

Maximising the State Pension

I’ll assume that I’ll get the maximum State Pension amount (I’ll need 10 years to be entitled to a pension and 35 qualifying years to bag the full amount).

I anticipate I’ll work for a sufficient period to meet the starting threshold. However, if my stock market gains are better than expected, early retirement is a possibility.

In that case, I’d pay voluntary contributions to maximise my State Pension payments.

So, as simply as that, I’ve secured my first £9,627.80 in annual passive income for retirement, barring drastic changes in government policy.

Investing in dividend stocks

I now need the remaining £20,400 to come from a diversified portfolio of dividend stocks. Let’s explore two on my watchlist.

M&G (LSE: MNG) is a global investment manager with exposure to a range of assets from equities to real estate. The M&G share price is down 16% over 52 weeks, but I’m drawn to the whopping 9.4% dividend yield, which exceeds the FTSE 100 average of 3.9%.

This business has a strong presence in the UK and Europe. It’s been listed on the London Stock Exchange since a demerger from Prudential. As its operations are in developed markets, growth prospects may not be too exciting. In addition, the high price-to-earnings ratio above 60 is a risk. This reduces the stock’s value investment appeal.

Nonetheless, M&G delivered total capital generation of £2.8bn over two years — well ahead of the original target. Furthermore, a £500m share buy-back programme is a big positive. Overall, I see potential for healthy shareholder returns in the future. So, I’d add to my existing holding for my passive income portfolio.

Next, Morgan Sindall Group (LSE: MGNS) is a FTSE 250 construction stock. With a 5% dividend yield, it’s a solid passive income pick. The latest annual results are encouraging. Group revenue rose 6% to £3.2bn and adjusted operating profit increased 92% to £131.3m.

However, there are macroeconomic headwinds. The S&P Global/CIPS UK construction purchasing managers’ index scored 56.4 in May — a four-month low. This indicator measures construction activity in the British economy. The Morgan Sindall share price could struggle in an increasingly tough climate.

Yet the company has an impressive list of active projects from schools to residential developments. The long-term outlook remains positive for me. I’d buy.

A long-term passive income goal

It’s important for me to remember that dividends aren’t guaranteed. Although I’ve selected high-yielding stocks to buy, I think it’s safer to expect a 4% annual yield from my portfolio.

That leaves a total dividend portfolio target of £510,000, which I’d aim to reach by investing £1,000 per month. Assuming a 4% growth rate, I’d take 25 years. Of course, this calculation would change should my investments underperform.

Ultimately, the dividends should amount to £1,700 per month, allowing me to leave my capital untouched in retirement.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Charlie Carman holds shares of M&G. The Motley Fool UK has recommended Prudential. 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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