With the best available interest rates on Cash ISAs being around 1.5%, they are unlikely to produce a large nest egg for retirement. As such, anyone looking to build a retirement fund that can produce a passive income in older age may be better off buying FTSE 100 shares.
At the present time, the index offers a range of companies that have relatively high yields. Here are two prime examples that may also be able to deliver capital growth in the long run that improves your prospects of retiring early – even if you have no savings aged 40.
The prospects for utility company SSE (LSE: SSE) have been unclear over the past few years. It has sought to make significant changes to its business model, such as selling its energy services division and focusing on renewable energy, that have caused investor sentiment to weaken at times.
This situation may continue in the near term, with political risks being at high levels at the present time. However, the company’s recent half-year results showed that it is making progress in implementing its strategy. For example, it is on course to complete the sale of its energy services division in 2020, while it has been able to secure new contracts within its renewable asset base.
Looking ahead, SSE is forecast to pay a dividend of 80p per share in the current year. This puts it on a dividend yield of just over 6%, which is around a third higher than the FTSE 100’s yield. The company’s dividend growth is likely to at least match inflation, while greater political certainty over the coming years may enhance its share price performance.
Packaging and paper company Mondi (LSE: MNDI) reported mixed trading conditions in its most recent quarterly update. It has experienced softer demand than in the previous financial year, which is expected to contribute to a decline in its net profit of 9% in the current year.
Despite this, the company is making encouraging progress on its capital investment. It has also seen signs of stabilisation in its fibre packaging division. Its consumer packaging division is making steady progress, and could benefit from further product innovation over the medium term.
Mondi’s dividend yield is expected to be 4.2% in the current year. Since its dividend payout is due to be covered 2.2 times by net profit this year, it appears to have a significant amount of headroom available when making shareholder payouts. This could mean that there is scope for dividend growth as the company’s strategy begins to have a positive impact on its financial performance.
Trading on a price-to-earnings (P/E) ratio of just 11, the stock appears to offer a margin of safety that could lead to capital growth over the coming years.
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Peter Stephens owns shares of SSE. 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.