UK shares have underperformed relative to global stock markets since the Brexit referendum, but they still offer some of the most generous dividends in the world. I think this makes them a great way to build a passive income for my retirement.
I can take that income free of tax, provided I invest inside my Stocks and Shares ISA allowance. If the Covid vaccination rollout continues to steam ahead, I think UK shares could play catch-up with other stock markets. Especially with Brexit divisions fading.
If the UK market does outperform this year, I could enjoy share price growth on top of dividend income. That will also be tax-free inside my ISA.
I’m building a passive income
I still have around 15 years to go before I start drawing an income from my portfolio. In that time, I’ll re-invest all my dividends for growth, to turbo-charge its value.
The last year has been bad for dividend investors, as companies have either cut or suspended payouts during the pandemic. Despite that, AJ Bell predicts the FTSE 100 will yield 3.8% this year. That’s impressive, given last year’s dividend bloodbath. And highly attractive at a time when the average easy access account pays just 0.18%.
I can generate a much higher yield by investing in individual company stocks. Financial services companies Legal & General Group, Standard Life Aberdeen and Phoenix Group Holdings currently yield 6.77%, 6.81% and 6.58% respectively.
Plenty of other top UK dividend shares also impress. Pharmaceutical giant GlaxoSmithKline yields 6.37%, Vodafone Group yields 5.92%, while utilities National Grid and SSE yield 5.69% and 5.52%.
These are all stocks I’d happily buy today and hold in my portfolio for the long term. I might even invest in the banks such as Barclays and Lloyds Banking Group, in the expectation that they’ll start to restore their dividends this year.
Mining giants such as BHP Group and Rio Tinto also tempt me, yielding 4.13% and 4.68% respectively. Other top UK shares such as Tesco, Sainsbury’s and Unilever offer slightly lower yields, but scope for dividend growth.
I’m buying a blend of UK shares
The important thing to remember is that dividends aren’t guaranteed. If earnings slip, payouts can quickly come under pressure, as we saw last year. That’s why I’d invest my £5,000 across a spread of companies, in case some of them slip. I’d also keep a pot of cash handy in retirement, as a reserve in case dividends fall.
That £5,000 isn’t enough to fund a decent retirement income on its own, no matter how well my stock choices perform. I’ll also make regular monthly payments, and pay in further lump sums when I have more cash to spend.
Investing in the UK shares is never a surefire bet. Markets could crash if mutant coronavirus strains delay the recovery. That’s why I always invest for the long term. History shows that, over time, they should deliver higher income and growth than almost any other asset class.
