With the State Pension age set to rise to 68 over the next couple of decades, many individuals may be concerned about their financial prospects in retirement.
In fact, with the State Pension currently amounting to just £8,767 per year, obtaining a second income in older age is likely to be of high importance for most people.
With that in mind, building a nest egg from which to generate a passive income in retirement through investing in FTSE 100 shares could be a shrewd move.
Here are two dividend growth stocks which appear to offer favourable risk/reward ratios for the long run.
The housebuilding industry may face an unsettled period due to uncertainty surrounding Brexit. However, this could be an opportunity for long-term investors to buy high-quality stocks such as Taylor Wimpey (LSE: TW) at discounts to their intrinsic values.
In fact, the company currently trades on a price-to-earnings (P/E) ratio of just 6.7. This is low relative to its historic range, while the company’s finances suggests that it is in a strong position to overcome the cyclicality of the property market.
For example, Taylor Wimpey has a solid balance sheet and a large land bank. Since demand for new homes is forecast to be higher than their supply over the coming years, while interest rates are expected to remain low even after the Brexit process concludes, the prospects for the business may be surprisingly robust.
An expected income return of 12% in the current year suggests that the stock offers a high total return outlook. From a risk/reward perspective, it could hold significant appeal, and may be able to outperform the FTSE 100 in the long run.
Also offering a wide margin of safety is FTSE 100 bank Standard Chartered (LSE: STAN). Although concerns regarding the outlook for the world economy could hold back its share price prospects to some degree, its financial forecasts remain highly encouraging.
In the current year, for example, Standard Chartered is forecast to post a rise in earnings of 18%. Despite such a positive outlook, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.6. This indicates it could be undervalued, and may be able to deliver a rising share price over the coming years.
While there are higher-yielding shares in the FTSE 100 than Standard Chartered, the company’s dividend growth potential means it holds income investing appeal. For example, it currently yields 4% from a payout that’s covered 2.8 times by net profit.
Therefore, its total return potential appears to be high, and it may be able to beat the wider index and help you to build a nest egg that offers a substantial second income by the time you retire. In doing so, your reliance on an increasingly inadequate State Pension could fall.
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Peter Stephens owns shares of Standard Chartered and Taylor Wimpey. The Motley Fool UK has recommended Standard Chartered. 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.