How dividend stocks could pay you more than the State Pension

The State Pension is just £164.35 per week. Here’s how to beat that with dividend stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The State Pension is not a lot of money. Currently, it’s just £164.35 a week, which equates to £8,546 per year. As I explained recently, that’s not really enough to provide a comfortable standard of living in retirement. 

However, if you’re worried about the low amount of income provided by the state, don’t despair, as there are other ways to generate an income in retirement. One such strategy that is popular among UK investors is dividend investing. Below, I’ll show you how dividend stocks could potentially provide you with a retirement income stream that is greater than that provided by the State Pension. 

Dividend income 

A dividend stock is one that pays investors a regular cash amount out of its profits. These kinds of stocks are very common here in the UK. Well-known companies such as Royal Dutch Shell, HSBC Holdings and British American Tobacco all pay dividends on a regular basis and often the cash payments are quite generous. Build up a portfolio of dividend-paying companies and you could potentially build up a sizeable income stream. So what size portfolio would you need to generate an income stream that is larger than the State Pension payout? 

Dividend yield 

The answer to that question depends on the stocks you own and the overall dividend yield on your portfolio. Construct a portfolio with a 4% yield and you would need capital of around £214,000 to generate more income than the State Pension. Build a portfolio with a 4.5% yield, and you would require around £190,000 in capital. Stretch your dividend yield to 5% and you would only need a portfolio of £171,000 to beat the State Pension’s payout. Are these yields achievable? Absolutely. Let’s look at an example.

Hypothetical dividend portfolio 

Consider the hypothetical portfolio below that contains 10 well-known FTSE 100 dividend stocks. 

Company Yield
Royal Dutch Shell 5.5%
BP 5.5%
HSBC Holdings 5.8%
Lloyds Banking Group 5.6%
British American Tobacco 5.1%
Unilever 3.1%
BAE Systems 3.6%
Legal & General Group 6.3%
ITV 4.9%
GlaxoSmithKline 5.0%
   
Average yield 5.04%

As the table shows, the average yield on this hypothetical portfolio is 5.04%. As a result, with this portfolio you would only need capital of around £170,000 to generate an income stream that is larger than the income from the State Pension.    

£170,000 x 5.04% = £8,568 

Of course, in real life, you would want to ensure that your portfolio was more diversified than this, in order to reduce the overall portfolio risk. This is also a simplistic example that ignores commissions, fees, FX rates and taxes. Yet the message is clear – dividend stocks can be a fantastic source of income in retirement.  

Combining dividend income with the State Pension

While the example above shows that dividend stocks could provide you with a higher income stream than the State Pension in retirement, it’s worth noting that the two sources of income are not mutually exclusive. In other words, there’s nothing to stop you from receiving the State Pension and a dividend income stream, although you may be taxed on your dividends if your dividend stocks are not held in an ISA.  

So for example, if you had £9,000 in dividend income coming in each year as well as the State Pension of £8,546, your total income would be £17,546, ignoring taxes. That kind of income stream would certainly help you live a more comfortable lifestyle in retirement than if you were living off the State Pension alone. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Unilever, Royal Dutch Shell, ITV, BAE Systems, GlaxoSmithKline, Lloyds Banking Group and Legal & General Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended HSBC Holdings, ITV, and Lloyds Banking Group. 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »