The UK State Pension isn’t worth a lot today. More and more, we need to save for a second income for when we hang up our work boots.
I can’t think of anything better than buying UK shares, with a focus on those that pay dividends. But which are the best? I think that depends on where we are in our plans.
So here are three I bought to make some cash to keep me going when I stop work.
I rate City of London Investment Trust (LSE: CTY) as the safest. It’s not one for share price growth, though it’s held up quite well.
I bought purely for the dividend yield. It’s about 5% now, which is good. What really sets it apart though, is that it’s been raised every year for 56 years in a row.
I think that makes it ideal for paying a second income in retirement. When it’s steady, year on year, it helps us take out regular cash that should hopefully be reliable and predictable.
There’s a risk that one year the trust won’t be able to lift the dividend. And if that happens, the price could take a dive.
But by the time I retire, I think I’ll have most of my stock market cash in diversified investment trusts like this.
Until then, I’m happy to hold stocks with less steady dividends. That includes Lloyds Banking Group (LSE: LLOY), on a yield of close to 5%.
It’s been through a lot of ups and downs since I first bought. The dividend was briefly stopped in the pandemic too. But over the years, I’ve had good income from it. I don’t want to take the cash just yet though. So I buy more shares with every penny I get from Lloyds.
But it does raise a question for later. Will I want to hold when the time comes for me to focus on more stable retirement income?
There are clear risks with a bank like this, as they can be upset by all sorts of economic trouble. So I’m not sure yet. But I do think I’ll eventually move most of my cash to stocks with more short-term safety.
Bricks and mortar
My third pick, Persimmon (LSE: PSN), is similar to Lloyds in the same key way. It’s at risk from the ups and downs of its sector, this time the property market.
The share price has had a volatile five years, and pretty tough past 12 months. The dividend can be variable too.
We’ve had some nice special payments in recent years. But for 2023, it looks like there’s only an ordinary dividend of about 5.5% on the cards. And the yield is only that high because the shares have fallen.
Mortgage interest looks like it’ll be high for a while yet. And the property market might slide some more. So I think a dividend cut could well be on the cards this year.
So, again, I’d say this is a good long-term cash generator. But it might not be one of the best for steady income once I retire.