Earning passive income from dividend shares is an excellent way of supplementing the State Pension. But with more immediate financial commitments to worry about, it’s tempting to put off saving for old age.
However, by investing in the stock market, I reckon it’s still possible have a decent retirement, even for someone starting at 40 with nothing.
How?
Initially, I reckon it’s necessary to have a focus on growth shares. These are more likely to deliver the long-term gains necessary to build a decent investment pot.
Of course, a 6% return from a portfolio of growth shares is the same as a 6% return from a collection of income stocks (assuming the dividends are reinvested). But there are more companies that have consistently delivered share price growth of 6% a year than those whose shares are yielding 6%.
Once retirement age has been reached, I think it’s then more appropriate to have a portfolio biased towards dividend stocks. For most people in their golden years, I suspect income’s likely to be more important than capital growth. Growth shares tend to be more risky.
Don’t delay
Someone in their early 40s has to wait around 25 years before they receive the State Pension. The table below shows how an investment portfolio could grow over this period depending on how much is invested each month, assuming a 6% annual return.
| Monthly investment (£) | Value after 25 years (£) |
|---|---|
| 100 | 67,958 |
| 200 | 135,916 |
| 300 | 203,874 |
| 400 | 271,832 |
| 500 | 339,790 |
A pensioner with a retirement pot of £339,790 could then earn, for example, 4.5% a year — £15,291 in cash terms — from dividend stocks. A full State Pension is currently £12,547 a year. Combined, these two income streams could give an annual income of £27,838, or £2,320 a month.
Something to consider
One dividend share I like is Persimmon (LSE:PSN). Because it has no debt on its balance sheet and it doesn’t need to spend huge amounts on capital items, it’s well placed to return the majority of its earnings to shareholders.
Indeed, a look back over the past five years shows a payout ratio of 87.5%. Just before the full impact of post-pandemic inflation was felt, the housebuilder paid dividends equal to 95% of is profit.
But we live in different times now. Facing higher construction costs and a drop in demand for new properties, the group cut its payout in 2023. This is a reminder that there can never be any guarantees when it comes to dividends.
Going in the right direction?
However, just before the conflict in the Middle East started, the group reported an improving outlook.
It’s hard to know whether recent events have fundamentally changed this assessment. However, it does appear likely that inflation is going to rise again and that interest rates will probably go up as a result. Worryingly, if the ceasefire doesn’t hold it could be a case of déjà vu and another dividend cut.
However, I’m confident that the world’s political leaders will soon see sense. Rising prices and higher interest rates are then likely to be a temporary blip.
If I’m right, Persimmon should continue its recovery. After all, there’s a chronic lack of housing in the country and the government’s keen to get Britain building again.
Coupled with its debt-free balance sheet, an abundance of land on which to build, and its 5.2% yield, I think Persimmon’s worth considering by investors today.
