Building a passive income to top up my State Pension in retirement is the work of decades. Patience is the ultimate virtue.
I’m targeting this by building a balanced portfolio of mostly FTSE 100 shares, with an emphasis on those paying the highest dividends. A high yield isn’t everything though. The income needs to be sustainable.
I believe the following five stocks can give me both, and merit their place in my Self-Invested Personal Pension (SIPP). Although there are no guarantees.
Should you invest £1,000 in Legal & General right now?
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I had high hopes for insurer Legal & General Group (LSE: LGEN) last year. I bought its shares in April, July and August last year at an average price of 226p. Today, they trade at 231.7p, a disappointing increase of just 2.52%.
Over 12 months, the L&G share price is up just 3.84%. Over five years, it’s down 14.46%. I think the market’s been unduly harsh on the stock (and the insurance sector generally). That’s why I’m hanging on.
This allowed me to pick up Legal & General’s shares at a relatively low valuation and grab myself a super-sized yield. Today’s trailing yield is 8.77% and I’ve already received two payouts, lifting my total return to 11.8%. That’s beats any savings account, and these are early days.
We could get the first interest rate cut as soon as September. If we do, I’d expect high-yield FTSE 100 dividend stocks to reap the rewards. It’ll make their income look even juicier compared to the yields from cash and bonds, which will fall.
Those rate cuts may take longer than I’d like, which is a big risk for the investment case. But I hope to hold my favourite five FTSE 100 dividend shares for years or, with luck, decades. Of course, I’ll monitor performance, and may sell if the fundamentals deteriorate.
My dividend heroes
I’m reducing risk by targeting solid blue-chips like housebuilder Taylor Wimpey. I’m already sitting on a total return of more than 33%, after less than a year. The stock’s expected to benefit from Labour’s ambitious building plans. Over 12 months, it’s up 49.52%, excluding dividends. The trailing yield is 6.31%.
I haven’t done so well out of pharmaceutical giant GSK. It’s up 13.47% over 12 months. However, I bought the stock in March and June, and I’m down around 10% as US litigation fears worry investors. Trading at 9.66 times earnings and yielding 3.88%, GSK looks even better value today. I may buy more.
I hold two more high-yielding financial services stocks – wealth manager M&G and insurance conglomerate Phoenix Group Holdings. Neither stock will shoot the lights out, but their fantastic dividends should compensate. Today, M&G has a trailing yield of 9.54% while Phoenix pays 9.79%. My research suggests both look sustainable, but we’ll see.
These five stocks give me an average yield of 7.66%. That’s a brilliant rate of passive income. I’m hoping it will rise over time. With luck, I’ll get plenty of share price growth on top.
