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I’ve bought these three UK dividend stocks in my pension portfolio to fund my retirement

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I like UK dividend stocks in my pension portfolio for two reasons. First, you can reinvest dividends. This, along with share price growth, compounds the growth of a portfolio. When it’s time to retire, the bigger the pension pot, the better. Second, dividends equal income in retirement. If a pension pot generates passive income, its capital can be preserved.

In particular, I like large-cap UK dividend stocks in my retirement portfolio. Getting more specific, I like the so-called dividend heroes, which tend to be larger companies that have paid dividends consistently for years. A pension pot needs to be a certain size to support an acceptable lifestyle in retirement. I plan to build one by saving and investing in stocks with reasonable returns (including dividend reinvestment) that are relatively low risk, along with other safer investments like government bonds.

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UK dividend hero stocks

Three UK dividend hero shares that I own are DiageoGlaxoSmithKline, and Unilever. All have made payouts to shareholders for at least a decade. That’s the kind of reliability I want for building up a pension pot. Their regular dividend payments combine with my contributions to help me buy more shares. And more shares mean more dividends are paid. Over time, substantial shareholdings can be built, hopefully enough to help me retire comfortably.

Diageo and Unilever are consumer goods companies. People love to gulp down their beverages and eat down their foods. Brand loyalty usually means stable revenues. Glaxo benefits from having a range of effective drugs in its portfolio. Drugs have to be used, no matter the state of the economy, and governments often buy on behalf of their citizens. Glaxo’s revenues benefit from the non-discretionary nature of drug spending. It’s easier to pay regular dividends with such stable revenues.

Looking ahead

Diageo, Glaxo, and Unilever have proven to be UK dividend hero stocks over the last decade. Analysts also believe they will continue their impressive run. The consensus view is that Diageo will pay a 69.93p dividend next time, giving the stock a forward yield of 2.8%. Consensus earnings are 111.44p, which covers the dividend payment 1.59 times over. Ideally, I would like to see dividend cover or two or more. But, we’re not in normal times, and 1.5 or more is acceptable.

Glaxo and Unilever have forward yields of 5.5% and 3.4% respectively. Although these aren’t eye-popping yields, remember, we’re looking for reliable dividend-paying stocks to fund a pension pot. Many companies, including over half of FTSE 100 members, have cut their dividends. Therefore, UK dividend hero stocks are in demand, which pushes up the price and lowers the yield.

Diageo and Unilever are trading at 22.51 and 20.27 times forward consensus earnings. These aren’t sky-high price-to-earnings (PE) multiples, but they are above what I would expect for income stocks and suggest they’re in demand. Glaxo looks cheaper trading at a PE multiple of 12.27, and that makes sense given its higher yield.

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James J. McCombie owns shares of Diageo, GlaxoSmithKline, and Unilever. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, and Unilever. 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.

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