I’m investing in FTSE 100 income stocks to boost my State Pension when I retire, and now looks like a great time to buy them. With the average stock on the index yielding 3.6% a year, it won’t deliver instant riches though.
If I invested, say, £1,000, I’d get income of just £36 in the first year. Frankly, I could spend that in an afternoon. However, by following the right strategy, I could generate income of almost £15,000 a year, which is roughly what the State Pension pays today. Here’s how I’d do it.
Planning ahead
It takes time to build a decent level of income from dividend shares. Even if I invested my full £20,000 Stocks and Shares ISA allowance this year, a yield of 3.6% would only give me income of £720. That’s way short of my £10k target.
The first thing I’d do to get round this is buy individual stocks rather than a FTSE 100 tracker, targeting those that offer more generous yields today.
Aviva, Rio Tinto, Imperial Brands, M&G and Vodafone Group offer yields ranging from 8% to 10% a year. If I filled my portfolio with stocks like these, I could up my average yield to 8.5%. That would give me income of £1,700 in the first year of my £20k ISA. Now that’s a bit better.
I wouldn’t draw that income today. Instead, I’d reinvest every dividend straight back into my portfolio, to buy more shares in my chosen companies. Then I’d keep doing it, year after year after year. Plus I’d get share price growth on top, when markets finally recover.
Naturally, there are no guarantees. To fund those juicy dividends, companies need to generate lots of cash and if they don’t they’ll have to cut shareholder payouts. Plus of course nobody knows when the stock market will find its lost mojo.
I’ll swing things in my favour by targeting well-run companies that have a strong track record of increasing profits and dividends. Then I’d spread my risk by investing in a balanced portfolio of around 15 shares for the long term.
I’m sticking at it
Let’s say my portfolio delivers an average return of 8% a year, which is roughly the average long-term total return on the FTSE 100, with dividends reinvested. Now let’s also assume I continue to invest £5,000 a year in a Stocks and Shares ISA.
I’m planning to retire in around 15 years. Using these assumptions, by the time I do retire I should have a portfolio worth £210,065. If my FTSE 100 dividend shares were yielding 7% a year by then, I’d be able to generate income of £14,704 a year.
If my stock picks continued to yield 8.5% instead, I’d have income of £17,855 a year. That may be asking too much, we’ll see. Either way, I will have achieved my target of doubling the State Pension, although I’d have to allow for future inflationary increases.
Investing in individual FTSE 100 stocks takes time and effort, but the potential rewards make it worthwhile. There’s no time to waste, though, which is why I’m busy buying FTSE 100 shares today, while markets are down and they’re cheap.
