Money is tight right now but I reckon investing as little as £100 a month in FTSE 100 income shares can mean the difference between a comfortable retirement and one that’s a struggle. I’d invest more if possible, but something is always better than nothing.
Even £100 a month may be sufficient to provide a generous five-figure passive income in retirement, for those who start early. Sounds unlikely? Let’s see.
The FTSE 100 contains some of the best dividend income stocks in the world. It’s one area where UK shares have the edge. The index as a whole yields around 3.87% today, more than double the US S&P 500‘s 1.6% yield.
Top-class dividends
Investors who prefer to buy individual equities can get a much higher income than that. More than 20 stocks on the FTSE 100 yield 5% or more. My own portfolio contains Legal & General Group, which yields a mighty 8.51%, and wealth manager M&G, which yields a staggering 9.65%.
It’s more than possible to build a portfolio of shares with an average yield of 6.5% a year. If they can also deliver 3.5% average share price growth over time, I’d be looking at an annualised total return of 10%.
Let’s say I was 30 today, and I started investing £100 a month, and increase that every year by 5% to maintain its real value. By age 68, I would have made total contributions of £129,251. Incredibly, my portfolio would be worth £818,898, assuming annualised growth of 10% a year. I’d have made a profit of £689,647, thanks to long-term compound interest.
Now let’s assume my portfolio still yielded 6.5%. From a pot of £818,898, that would give me income of £53,228 a year. That’s without dipping into my capital. It’s an incredible return from a relatively small regular sum.
Nothing is guaranteed when investing. An annualised return of 10% a year is at the higher end of the scale. If I got, say, 7%, my portfolio would be worth £429,742 and a 6.5% yield would give me income of £27,933. Still worth having.
Start early, stick at it
When choosing stocks, it’s important to check if the dividend is sustainable. The obvious figure to look for is dividend cover, which shows how well the dividend per share is protected by earnings. It’s easily found online. A figure of two is ideal, although 1.6 or 1.7 is more than acceptable, in my view.
I also look at the past dividend per share progress. I love to see companies that have steadily increased payouts, year after year. Companies that have cut or axed their dividend in the past may be more prone to do it again (the pandemic year of 2020 is an exception).
I’d also invest in at least a dozen income shares, and ideally more, to cushion the blow if one or two dividends don’t come through. That £50k income is only a target, and investors who don’t start until their 40s or 50s will have to work harder to achieve it. But it can be done, given time. The rewards make the effort worthwhile.
