What’s the best way to build a passive income portfolio to fund an early retirement? Some people like investing in property, but it’s not for me. I prefer the low costs (and low hassle) of investing in UK dividend shares.
By holding my shares inside an ISA, I can also avoid paying tax on my dividends. Over time, I hope to build a share portfolio that will provide me with the income I’ll need to support my retirement. If things go well, I may even be able to retire early!
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How much will I need?
Everyone’s circumstances are different. But like many people, I hope my cost of living will be a little lower when I retire.
Industry estimates by the Pension and Lifetime Savings Association (PLSA) suggest three possible levels of disposable income too support retirement for a single person:
- Minimum: £14,400 a year
- Moderate: £31,300 a year
- Comfortable: £43,100 a year
How much would I need to invest to generate this level of income from dividends? I’ve crunched the numbers on some examples.
FTSE 100 tracker fund
The FTSE 100 currently offers a dividend yield of 3.6%. If I put all of my investment cash in a low-cost FTSE 100 tracker fund today, this is what I’d need, based on the PLSA guidelines:
| 3.6% yield | Minimum | Moderate | Comfortable |
| Investment required | £400,000 | £869,444 | £1,197,222 |
To be honest, these numbers are higher than I’d hoped for. Fortunately, I think I can do better than this by investing in individual shares.
A 5% income portfolio
At the time of writing, the FTSE 100 and FTSE 250 collectively contain 69 shares with a forecast dividend yield of at least 5%.
Over time, I’m fairly sure I could build a portfolio that would provide a 5% income with the potential for further growth.
Although dividends are never guaranteed, by aiming to hold around 20 different stocks, I think I could limit the impact of any individual dividend cuts.
If I’m right, the sum I’d need to retire would fall sharply:
| 5% yield | Minimum | Moderate | Comfortable |
| Investment required | £288,000 | £626,000 | £862,000 |
Where I’d invest
Here’s an example of one dividend stock I already own that’s providing me with an attractive passive income. Retirement and insurance giant Legal & General Group‘s (LSE: LGEN) an example of a stock where investors are currently getting most of their returns upfront, in cash.
Although the group’s share price performance hasn’t been very exciting recently, the stock currently offers a chunky forecast dividend yield of 9.5%.
With more than £1trn of assets under management, Legal & General benefits from economies of scale. However, I can’t deny there’s some risk here – this is a huge and complex business, making it hard for investors to spot any looming problems.
My investment case is based on the view that Legal & General’s fast-growing pension buyout business will remain a strong cash generator, supporting attractive dividends.
The company certainly has a good record in this area. It’s paid a dividend every year for over 30 years, only cutting the payout once in the 2008/9 financial crisis.
I see it as a reliable high-yield income stock. I plan to hold the shares for the long term.
