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I’d build a high-income portfolio for retirement with solid dividend shares

Many of us are searching for ways to build a substantial portfolio to support a more comfortable lifestyle in retirement. Two emotions, fear and greed, may drive many investment decisions, but saving for retirement should be less emotional. And it need not keep you awake at night worrying if you have a clear plan.

Dividends and the power of compounding

As part of a diversified retirement portfolio, I’d look for shares that offer both value and a healthy dividend, which is a reward for holding a given stock over time. Many blue-chip UK shares yield a dividend income of between 3% and 6% a year.

One popular strategy involves buying the stocks of top UK dividend payers and using the distributions to acquire additional shares. The result is a powerful compounding process that can turn a modest initial investment into a sizeable nest egg over decades.

Partly because of the continuing Brexit saga, a considerable number of robust FTSE companies, such as those in the financial and real estate industries, have seen their share prices suffer over the past year. While negative headlines carry on, consumer confidence and investor sentiment regarding the fate of the UK economy have continued to ebb and flow.

Especially for new investors today, this decrease in share price offers a cheaper entry point if they decide to hit the buy button. As the markets get ready to move beyond Brexit, the price of many quality stocks will likely start to recover and the dividend income of shares bought more cheaply will be a bonus on top of any potential share price growth. 

Global growth

Let’s take a look at a company that might be an exciting pick for a starter dividend and growth portfolio. One share I’m taking a close look at is HSBC Holdings (LSE: HSBA).

The London-based bank’s operations are global and about three-quarters of profit comes from mostly corporate clients in Asia, offering exposure to Hong Kong and China.

Despite its international focus, the group has made substantial preparations for a no-deal Brexit. Like many other UK banks, to continue to have full access to the EU, it has been moving some of its operations, assets and staff to other countries, mostly France. Therefore, I believe any further negative effect of a potential no-deal scenario is already baked into the share price.

On 19 February, the group released annual results with both revenue and profit coming in below expectations. Management highlighted that concerns about a US-China trade dispute had impacted the banking giant. But stock markets could be ready to look beyond the trade war as both sides express willingness to finalise a new agreement soon. So despite the recent adverse sentiment toward companies with exposure to the Chinese economy, HSBC shares offer investors the possibility to invest in this growing region.

It has also initiated a series of cost-cutting measures to improve the bottom line in the coming quarters. As a result, analysts are expecting earnings growth of almost 5% in 2020.

And the bank’s current dividend provides a healthy yield of 5.8%, which makes it an important addition to any capital growth portfolio.

The bottom line

Although there are likely to be daily price swings in the shares as news headlines change, long-term investors may see any further price declines as opportunities to buy in.  

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.