Having no retirement savings at age 50 can cause a degree of stress and worry. After all, with retirement less than 20 years away and the State Pension being inadequate in terms of it being unable to offer financial freedom in older age, having a nest egg is likely to become increasingly important.
The FTSE 100’s income stocks could offer a favourable outcome in such a situation. They have historically contributed a large portion of the index’s total returns, and could continue to do so in the coming years. Likewise, they offer high yields which may improve over the long run. Eventually, they could provide you with a growing passive income in retirement.
While many investors may focus on buying growth shares when aiming to build a retirement nest egg, the reality is that the FTSE 100’s annualised total returns have been positively impacted by dividends in the past. In fact, various studies have shown that the reinvestment of dividends can have a surprisingly large impact on a stock’s total returns over the long run.
As such, buying dividend shares could be a better means of building a portfolio compared to growth stocks. In many cases, they offer greater resilience to the business cycle due to their mature status and solid balance sheets. And with interest rates expected to remain at a low level in the coming years, the 4%+ yields on offer within the FTSE 100 could become increasingly popular. This could raise demand for income shares and lead to them having higher prices.
The end result may be high total returns that lead to a sizeable retirement nest egg. And, for investors who can identify companies with scope to pay rising dividends due to them having bright financial prospects, they may benefit to an even greater extent from improving market sentiment.
Diversified income appeal
As well as offering impressive total returns, FTSE 100 dividend stocks have the potential to deliver rising incomes over the long run. Investing in them today, for example, may lead to a 4% yield on average. However, many large-cap shares will be able to beat inflation over the long run when it comes to their dividend payment growth. This could lead to a surprisingly large passive income during your retirement – especially if you are able to reinvest dividends wherever possible.
Furthermore, with over a quarter of the FTSE 100’s members having dividend yields that are in excess of 5% at the present time, there is a significant amount of choice for investors. They are able to build a diverse portfolio of companies that may offer reduced risk compared to a concentrated portfolio of shares. This could improve your chances of retiring with a nest egg that can provide a generous passive income in older age that reduces your reliance on the State Pension.
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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.