With a sizeable retirement pot, individuals have a variety of ways they can use their wealth to target a second income.
For instance, they can:
- Draw down a percentage each year (4% is a popular figure that provides money for around 20 years).
- Invest in rent-generating real estate.
- Purchase an annuity product.
- Load up on corporate and government bonds.
- Invest in dividend-paying shares.
I plan to purchase dividend shares to fund my own retirement. I’m confident it can deliver a long-term passive income while providing potential for further portfolio growth.
Six of the best
Investing in dividend shares can be a riskier choice than, say, purchasing an annuity that provides a set income every year. Dividends are never guaranteed, and a range of internal and external issues can arise that cause companies to slash, postpone, or cancel shareholder payments.
Individuals can substantially reduce this risk by investing in a range of companies, however. Take the following selection of UK dividend shares as an example:
| Dividend share | Sector | Forward dividend yield |
|---|---|---|
| Legal & General Group (LSE:LGEN) | Financial services | 9.1% |
| The Renewables Infrastructure Group | Renewable energy infrastructure | 9.7% |
| HSBC | Banking | 5.8% |
| Global X SuperDividend ETF | Exchange-traded funds (ETFs) | 11.1% |
| Assura | Real estate investment trusts (REITs) | 6.8% |
| Pennon Group | Utilities | 6.9% |
This portfolio spans a variety of sectors and geographies, reducing the risk of isolated problems and ensuring (in theory) a stable return over the economic cycle. The Global X SuperDividend ETF alone has holdings in 100 high-yield companies (including Phoenix Group and M&G) from multiple industries worldwide.
Pleasingly, each of these businesses carries an ultra-high yield right now. If broker forecasts are correct, a £50,000 investment spread equally across these UK shares would provide a £4,100 passive income over the next year.
That’s not all. I’m optimistic that this portfolio will deliver a growing cumulative second income over time as well.
A FTSE 100 dividend hero
Out of this selection, I think Legal & General shares are worth particular attention from dividend investors. I own them in my own portfolio, and plan to buy more when I next have cash to invest.
As I say, dividends are never certain, even among companies with excellent payout records like this. Payouts here haven’t been cut since 2011, and have risen every year (bar one) since then.
This year’s predicted dividend is covered just 1.1 times by anticipated earnings, leaving little wiggle room if profits are blown off course. If tough economic conditions dent demand for discretionary financial products, dividends here could well disappoint.
Yet I’m optimistic that Legal & General could still hit the City’s dividend projections. With a Solvency II capital ratio of 232%, it has substantial financial resources to hit its dividend growth goals (2% per year) and share buyback targets through to 2027.
And beyond then, I think dividends could keep rising as demographic changes supercharge demand for retirement and wealth products.
