If the State Pension wasn’t poor enough at just £168.60, the age at which we qualify for it is steadily rising and we’re even facing calls to make people wait until they’re 75 to get their hands on their old-age pittance. While I personally doubt that’s going to happen by the suggested 2035, it does emphasise the importance of providing for our own retirement.
For me, that provision is two pronged, through a combination of a SIPP (invested in shares) and a Stocks and Shares ISA. As an aside, with interest rates so low, even lower than UK inflation right now, I rule out a Cash ISA as it simply guarantees you’ll lose money in real terms.
Anyway, that’s the easy bit, but the harder question is what shares to put in our ISAs and our SIPPs. There’s a very strong argument for going mainly for dividend-paying FTSE 100 shares, picking high-yielders with a long record of solid payments, and diversifying across sectors.
The FTSE 100 is expected to provide an overall yield of 4.5% this year, which of course includes all the low dividends and companies that pay none. So with a bit of careful selection, you should be able to get a bigger yield, and that’s essentially been my own SIPP strategy. I have some Aviva shares with a forward dividend yield of 8%, for example, and Persimmon on 12%.
But with more SIPP cash to invest, I’m seriously looking towards the FTSE 250 as an alternative. The smaller index can be more volatile due to its make-up of smaller and less established companies, but over the past five years, it’s gained 21% while its bigger sibling has only managed 5.6%. And if we look back 10 years, the 250 is up 140%, well ahead of the 100’s 56%.
Over 25 years? The FTSE 100 has managed 133%, while the FTSE 250 has soared by 440%.
I haven’t included dividends, and the FTSE 100 yield is typically a little higher, but the FTSE 250 is easily the big winner overall — at least over the past quarter century. I always had it in my mind that the mid-cap index had outperformed its blue-chip counterpart, but I honestly hadn’t realised its performance was quite so superior.
How do you manage the need for steady income if you go for the FTSE 250? If you’re not retired, then you don’t need that yet. Hopefully you’re reinvesting all the dividends you get into new shares anyway, so all that matters is your overall long-term returns.
And if you are retired, or approaching retirement, one thing you could do is look for FTSE 250 dividend stocks. There are plenty of great ones, often overlooked, and we cover them regularly here at The Motley Fool.
But you know what? You actually don’t need dividend stocks to provide a regular income. If you have a portfolio of stocks that have grown the way the FTSE 250 has, you can just sell some when you need to — and if you work out the best sums and timings, you can keep costs very low. It’s your overall portfolio performance that matters, and I reckon the FTSE 250 deserves closer attention.
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Alan Oscroft owns shares of Aviva and Persimmon. 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.