I’m looking to generate the maximum possible second income in retirement, through a combination of my SIPP and Stocks and Shares ISA.
I’m investing in a spread of mostly FTSE 100 shares, focusing on those paying above-average dividends. Lloyds Banking Group, fund manager M&G and housebuilder Taylor Wimpey feature heavily.
Lloyds has a modest trailing dividend yield of 3.8%. It was closer to 5% when I bought it. The shares are up 40% in the last year and 195% over five, which partly explains while the yield has fallen. M&G offers a more generous trailing yield of 7.7%, despite the share price climbing a healthy 25% in the last year. Taylor Wimpey offers highest yield on the FTSE 100 at 9.25%, though its shares have struggled, falling 33% in the past year. It’s swings and roundabouts really.
Building up retirement savings
There are no guarantees in investing. But it helps to know roughly what size pot we need to target in order to generate the income we’d like. So I called in a bit of artificial intelligence and asked ChatGPT how much I’d need to target £3,000 a month, or £36,000 a year. Income from an ISA is free of income tax, so that figure is even more useful. Asking it things like that can be more useful than asking it for investment advice where it’s rather unreliable.
ChatGPT ran three yield scenarios. At a conservative 3% a year, it told me I’d need pretty hefty £1.2m. A moderate 4.5% yield brings the target down to £800,000. Stretching to 6%, which comes with higher risk of dividend cuts, means I’d need £600,000. Remember, dividends aren’t guaranteed, and companies can cut payouts if profits or capital needs change.
British American Tobacco is winning
One FTSE 100 income stock that’s been going great guns is British American Tobacco (LSE: BATS). I’ve shunned cigarette stocks for ethical reasons, but I’m finding recent performance hard to ignore. Over the past 12 months, its shares are up 42%. Throw in the trailing yield of 6.1% and the total return tops 48%. That would have turned £10,000 into £14,800.
The shares aren’t expensive either, trading on a price-to-earnings ratio of 10.55. That’s well below a typical fair value of 15. Tobacco may be declining in the west, but human beings still smoke five trillion sticks a year, and tobacco firms are exploring new revenue streams like vaping.
Risks remain. The sector faces constant regulatory and legal pressure, and competition for market share is fierce. I expect the British American Tobacco share price to slow after recent successes, but still think it’s worth considering as part of a long-term, income-focused portfolio.
Diversify and reinvest
Building a big retirement income requires starting early, investing consistently, and reinvesting dividends so they compound and grow. Holding a mix of high-yield, reliable FTSE 100 shares spreads risk and smooths income.
A Stocks and Shares ISA is ideal for this approach, letting income roll up tax-free. For me, the lesson is clear: start early, reinvest dividends, and give the portfolio time to compound. And I don’t need AI to tell me that.
