Here’s how much I’d need to invest in UK income stocks to retire on £25k a year

Harvey Jones is building his retirement plans on a portfolio of top UK dividend income stocks. There are some great yieldS out there today.

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I think the best way to top up my State Pension in retirement is to build a portfolio of dividend-paying FTSE 100 income stocks. I’m getting some brilliant yields, plus the prospect of share price growth over time.

Insurer Legal & General Group, for example, pays me income of 8.68% a year. Wealth manager M&G pays a staggering 9.88%. Taylor Wimpey yields 7.13%. Lloyds Banking Group pays 5.23%.

I’m building up my dividends

All of these stocks (and more like them) are tucked away in my self-invested personal pension (SIPP).

I’d love to add insurer Aviva (LSE: AV) to my SIPP. Its shares are forecast to yield an impressive 7.76% in 2024. Yet the shares look pretty good value, trading at 11 times forecast earnings (a valuation of 15 is seen as fair).

Aviva’s dividends have been a bit bumpy in recent years, but now appear to be on the right track. In 2022, shareholders received 31p for each share they held. The board hiked that to 33.4p in 2023, an increase of 18.5%.

While I wouldn’t expect the Aviva share price to rocket at any point – it’s just not that type of stock – it is up a solid 10.8% over the last 12 months. That would have given me a total return of around 18.5%, including the dividend.

I have no plans to sell any of my dividend stocks, although as ever with investing, there are no guarantees. Even big blue-chips can be volatile. Dividends will only continue for as long as management can generate enough cash to fund them. I mitigate the risks by building a portfolio of around 20 stocks. So if some flop, others will hopefully compensate.

Right now, the new State Pension pays £11,502 a year. If my SIPP generated income of £25,000 on top of that, I’d have more than £36k to live on. Yet generating a £25k passive income from shares is still a tall order.

Chasing high yields

Today, the FTSE 100 as a whole yields 3.8% a year. To generate £25k, I’d need £657,895. That’s a lot of money, although I do have a working lifetime to build it up.

A 21-year-old could get there by investing just £100 a month, and increasing that by 3% a year. This would give them £643,085 by age 68. This assumes an average total return of 7% a year, which is roughly what the FTSE 100 has delivered over the longer run.

Saving enough to last a retirement that may last for 25 or 30 years isn’t easy. Dividend shares make it more doable. Especially since it’s possible to generate more than 3.8% a year, by targeting high yielders like I’ve been doing.

Currently, my FTSE 100 income stocks yield around 7% a year. At that rate, I can hit my £25k income target with a smaller portfolio of £357,143.

With luck, my income should rise over time, as companies aim to increase their dividends every year if they can. My capital should rise too, with stock markets, albeit with plenty of volatility along the way.

It’s a challenge but I can’t think of a better way of doing it. That’s why I’m saving flat out via UK income stocks today.

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.

Harvey Jones has positions in Legal & General Group Plc, Lloyds Banking Group Plc, M&g Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. Views expressed on the companies mentioned 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.

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