Investing in the FTSE 250 could be a solid means of overcoming what is likely to continue to be an inadequate State Pension. Although it offers a welcome income in older age, the State Pension amounts to just £731 per month. As such, having a passive income from a retirement portfolio is likely to be a requirement for most retirees.
One means of achieving that goal is to invest in FTSE 250 shares. In many cases they offer low valuations and stronger growth prospects than the FTSE 100, as well as surprisingly high dividend yields.
With around half of the FTSE 250’s income generated from within the UK, the uncertain macroeconomic outlook has weighed on the index over recent years. As a result, many of its members now have valuations which appear to factor in the political and economic risks which continue to face the UK as Brexit moves closer.
This could lead to investors being able to generate a relatively high return in the long run through purchasing stocks which have wide margins of safety.
Certainly, there’s scope for the index’s valuation to move lower should the prospects for the UK economy deteriorate. But the FTSE 250’s track record shows it has always recovered from its difficult periods to return to posting record highs. As such, buying now could be a worthwhile move.
Of course, the prospects for the UK economy could be stronger than many investors currently anticipate. The country’s employment levels, inflation, and GDP growth forecasts are perhaps stronger than were expected to be a couple of years ago. And with the prospect of a conclusion to the Brexit process ahead in a matter of months, investor, business and consumer sentiment may improve to some degree.
In addition, the FTSE 250’s international exposure may catalyse its overall performance. The prospects for major economies such as India and China are strong, and could enhance the performances of a range of mid-cap shares.
As well as its low valuation and growth potential, the FTSE 250 also offers a surprisingly solid income outlook. Although the FTSE 100’s dividend yield is over 1 percentage point higher than that of the FTSE 250 at around 4%, approximately a quarter of mid-cap shares currently yield in excess of 5%. Therefore, it may be possible for an investor to build an income portfolio from FTSE 250 shares that offers an average yield which is above 5%.
With many of those dividend payments likely to rise at an above-inflation pace over the long run, investing in a range of FTSE 250 shares could be a sound move when it comes to building a retirement portfolio. It could help you to overcome the inadequacies of the State Pension and even retire early.
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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.