A retirement portfolio is never an easy thing to put together. Striking the right balance between income and capital growth can be tough, while knowing how much to withdraw each year may also cause sleepless nights for retirees.
Finding the right shares is another potential headache for all of us. Diversification is crucial for a healthy retirement portfolio, as major stock market losses with one or two companies can directly impact on an individual’s quality of life. However, even though the FTSE 100 is close to a record high, it may never have been easier to find the right, affordable, shares for a retirement portfolio.
Even though stock markets are high at the present time, the reality is that they are being propelled higher by only a portion of listed companies. In other words, with the world economy performing well and investors in high spirits, risk-taking is prevalent across the investment world. This means that cyclical companies with high growth potential are in vogue, with their valuations moving increasingly higher as investors pile into what is proving to be a sustained bull market.
As a result, investors are not especially focused on defensive shares and this could be good news for individual investors. For example, tobacco companies are desperately unpopular at the moment. Certainly, they face regulatory risk and the transition of smokers away from tobacco products and towards next generation products such as e-cigarettes. But with Imperial Brands, for example, having a dividend yield of over 7%, it seems to offer excellent value for money for anyone focused on their retirement portfolio.
The popularity of other defensive sectors such as utilities and healthcare is also at a low ebb. Companies within those areas undeniably face possible risks. But with investors seemingly not interested in stocks with robust outlooks, rather than the potential for stunning earnings growth, there could be an opportunity for current and soon-to-be retirees to buy defensive shares while they offer unusually wide margins of safety.
Due to the relative unpopularity of defensive shares, it is possible for retirees to generate income returns which are fairly high. Although previously-mentioned Imperial Brands’ yield is not typical of FTSE 100 shares, it is quite straightforward to build a diverse portfolio with a yield in excess of 4% at the present time.
This should provide retirees with greater flexibility in terms of how much they can withdraw per year. And with inflation now dropping back to a lower level, it is possible to obtain a comfortable real income return.
Certainly, there is the potential for the current stock market’s bull run to come to an end. But even if that occurs, defensive shares are unlikely to be hit anywhere near as hard as their growth-focused, cyclical index peers.
And if retirees are able to pick stocks that can provide reliable income streams during challenging economic conditions, then they may end up not worrying too much about the ups and downs of the stock market. This could leave them to simply pick up their dividends, and enjoy a well-earned retirement.
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Peter Stephens owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.