I don’t know exactly when I’ll retire, but I do know that I want a juicy passive income waiting for me when I do. My plan is to generate it from a portfolio of dividend-paying UK shares, split between a Self-Invested Personal Pension and a Stocks and Shares ISA.
I’d like to leave my capital invested to grow, while taking only the dividends as income. If I could generate £2,500 a month, that would give me £30,000 a year on top of the State Pension. But how much would I need?
Many investors use the 4% safe withdrawal rate as a benchmark. This assumes the underlying portfolio grows at around 7% a year. Take 4% as income, then reinvest the remaining 3% to protect its value against inflation.
FTSE 100 dividend heroes
To generate £30,000 a year on that basis, I’d need £750,000. That’s a big target. However, I think I can push the withdrawal rate up to 5% by building a balanced portfolio of higher-yielding FTSE 100 shares. That would cut the target to £600,000.
That may still sound daunting, but I’m asking a lot of my money. I want £30,000 a year in income, while preserving my capital. It’s like having my cake and eating it. If I bought an annuity instead, there’d be nothing left at the end. This way, there is. So I think it’s a goal worth aiming for.
To get there, I’m investing in dividend shares such as Lloyds Banking Group, Legal & General Group, and Taylor Wimpey. There’s another stock I plan to add before the ISA deadline on 5 April: HSBC Holdings (LSE: HSBA).
HSBC offers global exposure
While my stake in Lloyds is almost entirely focused on the UK market, HSBC generates most of its revenues from Asia, particularly China. That gives me some diversification within the banking sector, and the potential for higher returns, although it also raises the risk profile.
HSBC had a bumper 2023, with revenues jumping 30% to $66.1bn, while the total dividend per share doubled to 61 US cents. Growth has slowed since, with 2024 revenues edging down to $65.9bn, but the dividend rose another 42% to 87 cents. 2025’s figures are out next month.
The board was also treating investors to substantial share buybacks, although these were paused for three quarters from October to help fund the buyout of minority investors in Hong Kong lender Hang Seng.
The shares are up an impressive 51% over the last year, and 200% over five years, which actually gives me pause for thought. They can’t keep rising at that pace forever, so I have to lower my expectations in the short term. That strong run has also pushed the yield down to 4.1% on a trailing basis, although it’s forecast to hit 4.5% in 2026.
HSBC doesn’t look expensive, with a price-to-earnings ratio of 13.4. Despite the challenges, including a fragile global economy, China’s slowdown and wider geopolitical tensions, I think it’s worth considering with a long-term view.
While I’m still working, I’ll reinvest the dividends, and only start drawing them as income when I retire. I know my target, but there’s still some way to go. I think FTSE 100 shares like HSBC can help me get there, and there are plenty more I’m keen to consider right now.
