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Forget the State Pension. FTSE 100 dividend stocks can offer a growing retirement income

While the State Pension provides a welcome income in retirement, it is insufficient to cover the cost of living for many people. After all, it amounts to just a third of the UK’s average annual salary, with it currently standing at £8,767.

By contrast, the FTSE 100 could offer a means to generate a relatively impressive income that may grow at a faster pace than inflation. This could mean that now is the right time to focus on large-cap shares in order to enjoy financial freedom in older age.

High returns

With the FTSE 100 having a dividend yield of around 4.5% at the present time, it offers a relatively high income return. Indeed, its dividend yield is at the upper end of its historical range, with it only having been higher in the past for brief periods. They have generally coincided with times of significant distress for the world economy, such as during the financial crisis. While the outlook for the world economy may be uncertain at the present time, with there being a risk of a global trade war, it continues to post impressive GDP growth.

As such, the income appeal of the FTSE 100 remains high on a standalone basis, as well as when compared to other mainstream asset classes. Investors seeking to maximise their income in older age may be better off with FTSE 100 dividend stocks compared to bonds, cash and property – all of which may lack the income growth potential provided by large-cap shares.

Income growth

In terms of the potential for dividend growth, the FTSE 100 appears to be in a strong position. A number of its members appear to have improving financial prospects, as well as significant headroom when making payments to shareholders. Furthermore, their balance sheets seem to be robust in many cases after a strong performance from the global economy in recent years. This combination may mean that their dividend growth remains at relatively high levels over the medium term.

Therefore, even though inflation continues to be at a relatively low level, an investment in FTSE 100 dividend stocks could provide a rising income that beats inflation over the coming years. Following a decade where the UK has had a loose monetary policy, a higher rate of inflation may not be surprising over the medium term. Therefore, the capacity of large-cap stocks to deliver positive real-terms income growth could become increasingly appealing.

Risks

Of course, the relatively high returns of the FTSE 100 come at a cost. Shares are riskier than other mainstream assets, and there is the potential for capital loss. However, through buying a range of companies and holding them amidst the inevitable ups-and-downs that the stock market experiences, retirees may be able to pick up a high and rising income return over the long run that helps them to overcome the inadequate State Pension.

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Peter Stephens 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.