If you want to enjoy a comfortable retirement, you have to treat the State Pension as a starting point, then move on under your own steam.
Top it up
You could then consider building a portfolio of income-generating stocks and shares, using your tax-free stocks and shares ISA allowance. These two FTSE 100 stocks could be a good place to start as both offer astonishing dividend yields of more than 7% a year, two of the most generous on the index.
Utility supplier SSE (LSE: SSE) currently yields 7.7%, more than five times the return on a best buy cash ISA. Dividend income is not guaranteed, and there have been questions over whether the SSE payout is sustainable. However, it is currently covered 1.3 times by earnings, which offers some security.
Management recently re-based the dividend ahead of plans to separate the bulk of its retail division, so next year you will get 6.6%. That is still attractive. Management has a great track record on this front, increasing the dividend every year for the past quarter of a century, and plans to increase it in line with prices over the next few years.
SSE operates in a heavily regulated industry which puts a lid on growth so income is the main draw here. However, its investments in green energy could offer faster growth opportunities. This £10bn company is currently trading at a bargain price of 12.5 times forward earnings, a valuation that reflects the recent price cap and threats that a Jeremy Corbyn Labour government would nationalise utilities.
Ready for take-off
Travel giant TUI Travel (LSE: TUI) is a very different beast. It has been hugely volatile lately, its stock falling 47% in the last year, making it one of the worst performers on the index. If that level of risk scares you, then maybe look elsewhere. However, sharp slumps like this attract as many as they repel, as some investors go looking for bargains.
TUI currently trades at just 7.9 times forward earnings, roughly half the 15 times that is generally seen as fair value. There is a reason for that, though, as it issued a profit warning early in February. It followed this by reporting a sharp drop in first quarter earnings as problems in its markets and airlines division stretched into key the summer bookings period.
The £4.63bn group’s turnover rose 4.7% to €3.7bn but underlying losses jumped from €36.7m to €83.6m. Brexit is also to blame amid fears British airlines could be locked out of EU airspace under no deal. Sterling weakness, the 2018 heatwave and overcapacity in Spain have also hurt.
Tui may be heading for sunnier shores, as it will launch three cruise ships and open almost 30 new hotels this year, but first Brexit must be fixed. So again, there are risks. City forecasters predict 3% earnings growth in the year to 30 September, although they reckon they will rise 12% the year afterwards.
The big attraction is Tui’s forecast yield of 8%, with cover of 1.6. Combined with strong turnaround prospects this could be THE buy of 2019.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.