Ever wondered how much it would cost to try and match the State Pension by investing in dividend shares?
Not only might that mean an extra income source, but that income could potentially come without some of the strings attached to the State Pension such as rules about the age it can be paid.
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.
Making regular contributions over time
At the moment, the weekly state pension is around £230, adding up to an annual total of just over £11,978. That will likely keep growing over time, but to keep things simple I will base this illustration on the current figures.
To earn that much in dividends per year at an average 6% yield would require £199,637. For convenience, let’s just think of the target as being a round £200k.
Building that up could be done with regular contributions.
A decade of putting in the standard maximum ISA contribution of £20k per year would be enough.
In fact, reinvesting dividends during that time (known as compounding) could speed things up. Putting in £20k per year then compounding it at 6% annually would take nine years to hit the £200k target.
A Stocks and Shares ISA is only one of the platforms someone could use to do this. A Self-Invested Personal Pension or SIPP is another.
But whereas ISAs do not have rules on an adult withdrawing money based on age, SIPPs do. They are different to those governing the State Pension age, but could still be a factor to consider.
Cutting the cloth based on your own situation
Incidentally, that makes the approach sound relatively quick.
Not everyone is in a position to put £20k into dividend shares each year. But the same approach could work with smaller contributions, taking correspondingly longer.
As for the 6% target yield, a higher or lower number could also work, again with an impact on timelines.
6% is close to double the current FTSE 100 yield, but I think it is achievable in today’s market while sticking to blue-chip shares.
Looking to the long term
One share I think an investor ought to consider for its future income generation potential is FTSE 100 insurer Standard Life (LSE: PHNX).
Standard Life operates in an area that is crucial but does not always attract a lot of attention: long-term retirement and savings financial services.
Its recent renaming (from the previous name of Phoenix Group) ought to help lift the company’s profile, as Standard Life has a long-established, widely known brand.
This business area can be dull but lucrative, with around 12m customers and an approach focussed on the long term. With economies of scale, asset management expertise and a proven business model, the firm has proven to be a substantial cash generator.
That has let it grow its dividend per share annually in recent years and its aim is to keep doing so. The current yield is 7.1%.
One risk I see is choppy financial markets hurting the valuation of some assets. If that forces it to write down values, such as in its mortgage book, that could reduce earnings.
Dividends are never guaranteed, but I like the income prospects of Standard Life.
Diversification is always important, though – and it is only one of the UK’s income shares I like the look of right now.
