How I pick shares for passive income in retirement

We all have our individual strategies for building a portfolio of passive income shares. I think the successful ones share some key features.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

One English pound placed on a graph to represent an economic down turn

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the value of the State Pension constantly eroding, anything we can do to improve our retirement income has to be good. Company pension schemes, private pensions, they can all help provide passive income.

My favoured approach is to invest in shares in UK companies, to provide regular dividends for my retirement. And there are some impressive dividend yields to be had these days, especially from shares in the FTSE 100.

But buying shares is risky, isn’t it? So what’s the best way to keep our long-term investments as safe as possible, while still building up a comfortable passive income stream?

Do your own research

Well, the first key thing is that each individual investor needs to work out their own strategy. We each need to be comfortable with what we’re doing, and happy that we understand it. Ever read any headlines saying things like: “Trust me, this is a sure-fire winner“? I instantly dismiss such nonsense.

The success of my long-term investing depends solely on me. I take 100% of the credit for my investments that come good. And all of the blame for those that fail.

And this is something that really needs stressing. Even the best investors can suffer spectacular failures from time to time. I’ve had a handful of 100% wipeouts in my decades of investing.

Diversify

That brings me to my key, number one, most important approach to managing risk. It’s diversification. I’ve always spread my investment cash across a number of different shares in different sectors.

I owned bank shares when the financial crisis hit. But I also had shares in multiple other sectors, and only a relatively small portion of my retirement money was damaged.

Dividend or growth?

When we’re investing for passive income, it’s tempting to buy only dividend stocks. I think that’s the best way to eventually take my income after I’ve retired. How much easier can it get than just sitting back and waiting for the cash to drop in?

But while I’m building up to it, I don’t want to take any income yet. I do actually buy mostly dividend shares. But that’s largely because I see them as mature and relatively safe companies. I say relatively because, well, we only have to look at the Covid years and the economic crunch to see how even the best can suffer.

Right now, I let my dividends accumulate. And when I have enough for a purchase, I buy more shares. So why not go for growth shares, looking for share price accumulation instead and not having to think so much about reinvesting dividends? Dividends or growth? I don’t think it matters. It’s quality that counts.

Strategy

My approach to building a long-term passive income pot is based on the two key principles I mentioned above. I do my own research and never let others decide for me. And I diversify my investments for safety.

I have a third cornerstone too, and it’s investing for the long term. Following billionaire investor Warren Buffett’s advice, if I wouldn’t want to own a share for 10 years, I wouldn’t hold it for even 10 minutes.

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 assessed. Consider taking independent financial advice.

Views expressed 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.

More on Investing Articles

Mixed-race female couple enjoying themselves on a walk
Investing Articles

A once-in-a-decade chance to get rich buying growth stocks?

We haven't seen a good spell for growth stocks for quite a few years now. But I reckon the signs…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

The FTSE 100 is full of bargains! Here’s 1 stock I’m eyeing up

A weak economic outlook has hurt the FTSE 100. This Fool explains why she likes the look of this consumer…

Read more »

Investing Articles

2 no-brainer beginner FTSE 100 stocks to buy for my portfolio

Getting started with investing can be daunting. Here are two stocks for beginners to consider buying to build their first…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 recession-resistant UK shares investors should consider buying

Our writer details two UK shares she feels could withstand some of the ill-effects of the current malaise to provide…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Glencore share price drops on results. Time to buy?

The Glencore share price wobbled a bit after a weak set of 2023 results. Here's why I have the stock…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Big trouble in China sinks HSBC shares. Should I invest after record FY results?

HSBC shares have slumped following a disappointing end to 2023 for the FTSE stock. Royston Wild explains why this may…

Read more »

View of Tower Bridge in Autumn
Investing Articles

3 dirt cheap FTSE 100 shares to snap up today?

The FTSE 100 is rallying, but many shares still look super cheap on fundamentals. Is our writer buying these three…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

FTSE 100 earnings: what can we expect from Rolls-Royce in 2024?

The Rolls-Royce share price tripled in 2023. Roland Head wonders whether this FTSE 100 stock could continue that impressive trajectory…

Read more »