The Motley Fool

Approaching retirement? I’d buy FTSE 100 shares for dividend income

Visualising your future self in your retirement years can be a challenge for many people. Yet most of us realise that relying only on the State Pension for retirement income is not viable as the benefits just don’t cut it. The full amount Britons can expect from the government is currently less than £9,000 a year and not everyone actually qualifies for that amount. 

In light of this, retirees and soon-to-be retirees may need to think long and hard about establishing their own investment portfolios to lessen their reliance on the state. By investing in income-producing investments like dividend stocks, you can establish a regular income stream that supplements your pension benefits. 

How much dividend income you can earn

Research and anecdotal evidence show that many people don’t plan for the financial aspects of retirement adequately. Too many Britons don’t save enough even if they save, they may not necessarily put their money to use by investing in rewarding asset classes such as equities.

Retirement needs a plan that makes it possible to be better prepared for the future.

This is where dividends from FTSE 100 stocks may come in. It’s the index Britons mostly consider when they start investing. It’s composed of the 100 largest companies (by market capitalisation) on the London Stock Exchange (LSE).

As one of the highest-yielding markets in the world, it currently has a generous dividend yield of 4.5%. Dividend yields show investors what percentage a specific share returns relative to its price.

For example, if a stock trades at £50 and the company’s total annual dividend is £2.50, then the dividend yield is 5%.

Any capital gains delivered by a stock in your portfolio would be an added bonus on top of the dividend.

Gathering a portfolio of FTSE 100 dividend shares and holding about £100,000 worth would, on average, generate £4,500 of passive income a year. If your portfolio is worth £200,000, then your annual dividend income will likely be about as much as the full State Pension.

The shares I’d consider

If you’re new to investing, you could buy individual stocks that are suited to novices, or make it easy and buy into a FTSE 100 tracker. Another option could be to invest in low-cost exchange-traded funds (ETFs). For example, if you’re interested in dividend stocks, then the iShares UK Dividend UCITS ETF may be one to consider.

With that in mind, here are several large-cap shares I’m watching right now. I’d be willing to invest in them in 2020, especially if there’s any dip in their share prices. I’d like to buy these high-quality and dividend-paying businesses when they trade on low valuations and keep them in my portfolio for many years. Just check out their yields, price-to-earnings (P/E) and price-to-book (P/B) ratios.

  • Aviva – dividend yield 7.5%, forward P/E 6.5, P/B 0.88
  • Barratt Developments – dividend yield 3.6%, forward P/E 11.1, P/B 1.66
  • Glencore – dividend yield 6.9%, forward P/E 10.7, P/B 0.9
  • BT – dividend yield 8.9%, forward P/E 6.9, P/B 1.64
  • Imperial Brands – dividend yield 10.7%, forward P/E 7.2, P/B 3.69
  • Lloyds Banking Group – dividend yield 5.5%, forward P/E 8.1, P/B 0.83
  • WPP – dividend yield 6.1%, forward P/E 10.5, P/B 1.27

As always, these aren’t formal recommendations. but they could be a starting point for more research. 

Finally, if you’re unsure about which type of assets may suit your needs, you may want to talk to a financial adviser before moving forward with a specific type of investment. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Lloyds Banking Group. 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.