The State Pension’s a financial lifeline for millions in retirement, but without other sources of income, life will be a struggle. Thanks to the triple lock, the new State Pension will rise to just over £12,547 from April, an increase of 4.8%, but that’s still less than half the average full-time wage.
Retirement will be a lot more enticing if people can generate their own passive income on top, which I’m doing by building a portfolio of income-paying FTSE 100 shares.
They offer a brilliant combination of capital growth and dividend income. Dividends can be reinvested while still working to boost total returns, then taken as income in retirement. Investing through a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) is straightforward once set up, and brings huge tax advantages too.
The more complex part is deciding which shares to buy and how to spread them across a balanced portfolio.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Aviva’s a top performer
Some of the best dividend payers yield 8% or 9% a year, but I’ve been looking closely at insurer and asset manager Aviva (LSE: AV.). Its trailing yield’s 5.33%, yet it’s been delivering heaps of growth as well. The Aviva share price has jumped 48% over the past year and almost 175% ahead over five years, with dividends on top. That’s an impressive turnaround for a stock that used to just plod along.
Chief executive Amanda Blanc’s done an excellent job since July. She’s streamlined the business, offloaded underperforming divisions and sharpened the company’s focus. The result has been a much stronger share price and reliable cash generation to fund rising dividends.
Yet individual stocks can be cyclical. Sometimes they surge ahead, at other times they stagnate or slide. The beauty of dividend shares is that they keep paying even when prices dip, allowing investors to compound their stake while waiting for the next bull market.
Rising passive returns
After such a strong run, Aviva’s valuation looks a bit high with a price-to-earnings ratio of 28. If profits slip, the shares could fall for a while. Alternatively, a stock market crash could hit shares across the board. So there are risks here. That’s why diversification matters, as other holdings can offset any short-term weakness.
In 2024, Aviva paid a dividend of 35.7p per share. That’s forecast to climb to 38.6p in 2025, an inflation-busting increase of just over 8%. That highlights one of the best features of dividend investing: with luck, the income rises over time.
Based on the forecast 38.6p shareholder payout, it would take 2,591 shares to generate £1,000 of annual income. With the Aviva price around 699.8p today, that requires an investment of roughly £18,132. Now that’s a lot for one stock, so I wouldn’t go all-in, but it shows the potential on offer.
Someone who built a £200,000 portfolio of diverse stocks yielding an average of 5% like Aviva would earn a more impressive second income of £10,000 a year on top of their State Pension.
I think Aviva’s worth considering for income-focused investors today, as part of a diversified portfolio. And I can see some even more generous income FTSE 100 shares out there today.
