With the State Pension amounting to just £8,767 per annum, the vast majority of retirees will require a second income in older age. As such, it could be worth buying a diverse range of FTSE 100 shares to generate capital growth and income over the long run.
At the present time, the index offers a relatively attractive dividend yield of 4.3%. This suggests that it has a wide margin of safety, while its international exposure may produce improving growth opportunities in the coming years.
For those individuals who require an income from their capital to supplement what is a relatively disappointing State Pension, the FTSE 100 could be highly attractive. Its dividend yield is significantly higher than the interest income that can be generated on cash savings or bonds.
In many cases, Cash ISAs and savings accounts offer returns that are below inflation, while it is a similar situation for many investment-grade bonds. Since interest rates are expected to stay at a low level over the medium term, this situation may not improve and even large sums of capital may fail to offer a worthwhile income return compared to investments in the FTSE 100.
Additionally, FTSE 100 shares offer dividend growth potential in many cases. Since the index is made up of mature businesses, they have solid track records of paying rising dividends. In fact, it is likely that the dividend growth opportunities within the FTSE 100 will beat inflation over the long term – especially among those businesses that have dividends that are modest when compared to their net profits.
The FTSE 100 can also help individuals to build a retirement nest egg for the future. Its dividend yield suggests that it offers a wide margin of safety, while many of its members trade on low price-to-earnings (P/E) ratios. This may be due to the risks faced by the world economy, with investors demanding lower prices to account for the apparent uncertain operating environment for many businesses. This could present a buying opportunity for investors who can overcome short-term volatility to make long-term gains.
The index’s capital growth potential looks set to be boosted by its exposure to fast-growing economies. With its constituents generating the majority of their sales and profit in non-UK markets, the FTSE 100 may be able to offer stronger growth prospects than the wider UK economy. This could make it an even more appealing investment at a time when the UK’s political and economic future is relatively unclear.
State Pension challenges
Although the State Pension is likely to rise at a brisk pace in the coming years, it may be insufficient to provide most retirees with financial freedom. The FTSE 100’s modest valuation, growth potential and income prospects could make it a relatively sound place to invest for a wide range of individuals who are seeking to maximise their income in older age.
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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.