If you want to retire with more than just the basics, you may want to start thinking about building a passive income stream. A State Pension won’t go far, and after taxes and inflation, many retirees find their savings quickly depleted.
Fortunately, the UK stock market is one of the best in the world for shares that pay regular dividends. With the average FTSE 100 yield upward of 3.5%, many find dividend investing returns are more than a basic savings account.
With an aggressively income-focused portfolio, an average yield of 6% (or more) is a realistic target. So a contribution of just £100 every month for 20 years could grow to around £60,000 (with dividends reinvested).
At that level, a 6% yield would pay out £3,600 a year in passive income (£300 a month). Not only would you have a £60,000 nest egg but you’d be getting back triple your initial contributions!
So why doesn’t everybody do this?
Well, unlike a savings account, the returns aren’t guaranteed and the value of shares can go up and down. A lack of market knowledge combined with a fear of loss is enough to scare most people off.
But in reality, it only takes a bit of research and some careful planning to reduce the risk of losses to a minimum. Historical evidence suggests market participants can achieve superior long-term returns to savings accounts — and often do. By example, the S&P 500 has delivered 12.1% annualised returns since 2015, vastly outpacing basic savings interest that typically ranges from 2%-4.5%.
Unfortunately, many investors make simple mistakes. Some dive into speculative stocks based on sensationalised news, others panic sell at the first sign of trouble.
Smart investors tend to follow a less emotionally-charged and more sombre strategy. My personal favourite is making regular contributions to a diversified portfolio of reliable — albeit boring — dividend shares.
How does an investor assess reliability?
Think of the oldest restaurant in your town — family-run, hasn’t changed in decades, consistently good food, and affordable prices. Boring? Maybe. Reliable? Yes. I’d invest in that restaurant — it’s got history, deep roots and a solid reputation.
There are many UK stocks that fit that criteria, for example Investec (LSE: INVP). The wealth manager’s 6.5% dividend yield’s significantly above the UK average and supported by solid fundamentals: 2.7 times cash coverage, a comfortable 46% payout ratio, and a decades-long track record.
Not only does this add reliability but suggests substantial room for dividend growth without straining finances. Dividends have already increased from 24p to 37p over five years — a 6.7% annualised growth rate.
Naturally, there’s a few risks. As an investment firm, its more exposed to market volatility and interest rate fluctuations — not to mention political instability in South Africa, one of its key operating regions.
The bottom line
Investec’s recent full-year results reveal an impressive 8% operating profit growth and a 13.9% return on equity (ROE), reflecting strong underlying business performance.
But it’s just one of many reliable FTSE 100 dividend shares that are worth considering. For other reliable options, think about retail, utility or healthcare stocks with a long history of dividend payments.
