I don’t know about you. But I have no intention of working well into my late 60s or early 70s. It’s why I buy dividend stocks to help me build a healthy nest egg for when I retire.
Relying on the State Pension to fund my retirement is likely to be a big mistake. The rate at which benefits are rising has been pretty weak in recent years. And annual increases are likely to remain subdued due to soaring debt and a growing elderly population.
The age at which people can claim the State Pension is poised to rapidly rise in the coming decades, too. In fact, the Institute for Fiscal Studies (IFS) has speculated that the claimant age may have to rise to 70 by 2050. This would keep the share of adults aged over the State Pension age at current levels of 24%.
In a recent report the IFS also claimed that:
“there are a number of key challenges facing future generations of pensioners that threaten their living standards in retirement and which, without policy action, mean many are likely to face substantial financial difficulties in older age.”
These are sobering things to digest. But they shouldn’t cause most people reason to panic. This is because building a diversified portfolio of growth and dividend stocks can help investors eventually live out a comfortable retirement.
Times are tough right now. And for many, it’s difficult to set money aside for retirement as inflation remains at sky-high levels. Yet if one starts their investment journey early enough, it’s still possible to build a healthy pot of cash.
The FTSE 100, for instance, has delivered an average annual return of 9% down the years. If this rate is repeated over the long term, someone who invests £300 a month could — after 25 years with dividends reinvested — make a juicy £304,900 to retire on.
This is thanks to the miracle of compounding, where an individual earns interest on the initial investment as well as on reinvested dividends.
2 FTSE 100 shares I’ve bought
Buying high-yielding dividend stocks can prove a useful way of hitting or even exceeding that 9% average annual return. Though a combination of capital appreciation and solid income, I think Legal and General (whose dividend yield sits at 8% for 2023), for one, could help me generate market-beating returns.
The business is a terrific cash generator which, in turn, gives it the firepower to pay big dividends. And while competition is a problem, I think trends like ageing populations and rising interest in personal investment will drive earnings higher.
Earnings here may suffer in the near term as the global economy cools. Yet as green technologies become more popular, and rates of urbanisation increase worldwide, I expect demand for its commodities to gradually rise and pull profits higher. Today, Rio Tinto shares yield an impressive 6.8%.