I think that most of us would like a reliable extra income to help support us when we retire. I believe that one of the best ways to achieve this is by investing in high-yield dividend stocks that should continue to pump out cash for many years.
In this article I want explain why buying stocks like this today could help you to generate a bigger retirement income than you might expect.
The example I’ve chosen is FTSE 100 insurer Aviva (LSE: AV), which is a stock I’ve owned for a number of years. But this tip should work with any solid company that pays regular dividends.
A great investment!
I bought my first Aviva shares in April 2012, for a price of 310p. The shares have risen by about 30% since then, to roughly 400p. That might not seem like a great result, but I’d beg to differ.
The reason for this is that over the last seven years, I’ve also received dividend income totalling 163p per share. That’s equivalent to 53% of my purchase price. That means I’ve enjoyed a total return of about 83% in seven years – equivalent to an average return of 9% per year.
However, things get even better when you take another look at the dividend. Aviva is expected to pay a dividend of 31.3p per share for 2019, according to broker forecasts. That’s equivalent to 10% of my original purchase price.
This will give me a 10% dividend yield on cost. I estimate that if the Aviva dividend remains unchanged, then by 2024 I will have doubled my original investment through income alone, in addition to any share price growth.
Why I love this technique
The beauty of this approach for me is that I get a large, growing share of the returns from my portfolio in cash.
While I’m still working and saving for retirement, I use all of this dividend cash to buy more shares – keeping them inside my Stocks and Shares ISA to avoid any future tax liabilities.
When I’m ready to retire, I’ll be able to start withdrawing this income from my ISA without having to sell any shares or make any changes to my investing strategy.
In my view, this is the ideal scenario for a retirement portfolio. Although I enjoy investing, I don’t want to have to spend my later years worrying about my stocks and researching new investments. I’d prefer to be able to get on with life and receive a growing passive income.
Is this the right time to buy?
The share prices of UK-focused stocks rocketed higher on Friday as markets reacted to renewed hopes of a Brexit deal. Aviva benefited from this rise – at the time of writing, the shares were up by nearly 7%, at 407p.
Despite this, I continue to believe that this insurance stock offers good value.
New boss Maurice Tulloch seems likely to split up and streamline the group to improve focus and results. Although growth has been disappointing in recent years, cash generation has been good and the group’s financial position has improved.
At current levels, AV stock offers a cash-backed 7.7% dividend yield and is trading below its net asset value of 432p per share. I’d be very happy to buy at these levels.
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Roland Head owns shares of Aviva. 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.