There’s more than one way investors can target a healthy passive income in retirement. An effective way could be to purchase dividend shares that provide a steady stream of income.
There are other ways to try and achieve the same goal. Individuals can apply the 4% drawdown rule, which involves withdrawing that percentage of an investor’s total portfolio annually. This strategy typically ensures an income for around 30 years before the well runs dry.
Others prefer the security of a guaranteed minimum income through a fixed annuity policy. Variable annuities and indexed annuities are also popular, as they can deliver higher returns while still delivering a level of income stability.
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For me, the first option’s the most appealing. This is because:
- Holding dividend shares can provide a steady income, and potential capital appreciation that grows my portfolio
- I like the idea of retaining my capital base and maintaining the flexibility of managing and adjusting my investments as needed
- Buying dividend growth stocks can help my passive income keep pace with (or outstrip) inflation
This is what I’m doing
In order to hit my target, I’m buying a mix of shares to build my portfolio and give me a large pot to eventually invest in high-yielding dividend shares.
When executed effectively, diversification can mitigate risk without sacrificing overall returns. Renowned economist Harry Markowitz famously said it’s “the only free lunch in investing“.
I own a mix of value, growth and dividend shares that provide the potential for share price appreciation along with a steady income. I also spread my money across a variety of sectors and geographies to provide a smooth return across the economic cycle and protect my overall returns from problems in one or two areas.
With this strategy, I’m targeting what I consider a realistic average annual return of 9%. The amount I invest each month varies, but if I invested £500 a month I would — after 30 years — have a portfolio worth around £915,372 (excluding broker fees), based on that return.
If I then ploughed that into 5%-yielding dividend stocks I’d have a yearly passive income of roughly £45,769. There’s a good chance that would allow me to live comfortably in retirement.
A top stock
Admittedly there’s a potential flaw in my strategy that could impact my passive income in retirement: dividends are never, ever guaranteed. We saw this during the Covid-19 pandemic, when scores of companies either reduced, postponed, or cancelled altogether shareholder payouts.
However, investors can limit the chances of a passive income strategy by purchasing an array of high-yielding dividend shares. My plan is to hold around 10-15, including Legal & General (LSE:LGEN), which I already own in my portfolio.
Legal & General’s very cash-generating, which allows it to pay a large and rising dividend every year. Payouts here in fact have grown every year since the late 2000s.
Despite the threat of major market competition that can’t be ignored when assessing an investment in this company, it has a great chance to grow profits, thanks to seismic demographic changes. As the number of elderly people across its territories increases, demand for retirement, protection and wealth products is tipped to explode.
With a robust Solvency II capital ratio of 223%, Legal & General can invest heavily to exploit this while still continuing to pay huge dividends.
