As of right now, the full UK State Pension is £230.25 a week. But for members of Generation X, who still have around 15 years or so to retirement, relying on this is a risky business.
There are, however, a number of strategies for Gen X-ers wanting to try and put themselves in a stronger position for retirement. And investing in dividend stocks might be one of the best.
Retirement
According to Pensions UK, a single person needs a minimum income of £13,400 a year to be able to retire. And the State Pension right now is around £118 a month below this.
The Triple Lock currently stops the difference widening in real terms. But if inflation averages 3% a year, the difference could be around £185 a month 15 years from now.
In other words, Gen-Xers need to think about how to make at least £185 a month in extra income in retirement. Fortunately, this might not be as difficult as it sounds.
I think someone who puts aside £150 a month for the next 15 years has a realistic shot at earning £185 a month in passive income from that point on. Here’s the plan I have in mind.
A 15-year plan
The plan involves investing in the stock market. More specifically, it involves buying shares in companies that distribute part of their profits to investors in the form of dividends.
Shareholders have a choice about what they do with the cash. And one strategy for Gen X-ers is to reinvest for 15 years before ultimately using it as extra income in retirement.
Reinvesting dividends for 15 years at a 5.5% average annual return can turn a £150 monthly investment into £185 a month in passive income. And I think a 5.5% return is highly realistic.
A few stocks currently have dividend yields above 5.5%. But even with ones that don’t, the best businesses find ways to grow and return more cash to shareholders over time.
An example
One interesting name to consider is Croda International (LSE:CRDA). The share price has fallen 54% in the last five years, but I don’t think there’s much wrong with the underlying business.
Croda makes chemicals for consumer, industrial, and life sciences applications. The stock is down largely because heavy buying during Covid-19 has given way to excess inventory levels.
That can’t last forever, though, and the firm’s products are well-protected by patents. So while the company is in a challenging situation, I think that’s making the stock unusually cheap.
The dividend yield is currently 4%. But the ability to raise prices and a 30-year record of consecutive increases, I think a 5.5% average over the next 15 years could well be on the cards.
Passive income
A dividend stock portfolio can be a great way to fill the gap between what the State Pension provides and what someone needs to retire. And it’s not just Generation X that can do this.
The longer the Triple Lock remains in place, the more expensive it becomes. But more time also gives investors more opportunities to reinvest dividends to compound returns.
With some smart choices, I think investors can build a portfolio that grows faster than inflation. And this could be a really valuable asset in retirement.
