In the UK it’s a little bit of a taboo to ask someone’s age. While I’ll state that I’m no longer in my early twenties, it’s true that I’m going to be working for several decades more before I hit retirement age. But with my long-term investing approach, here are some of the income shares I think I could buy now that could still be paying out cash in retirement.
Stocks with a rich history
The obvious first question is what filters could I reasonably apply to try and find stocks that are reputable income payers? To begin with, I want to look at the past.
It’s true that the past doesn’t predict the future. Yet I feel that if a company has been regularly paying dividends for the past decade or more, it’s reasonable to think that this trend could continue.
For example, Unilever and British American Tobacco both have a proud history of growing dividend payments over 20 consecutive years. Granted, the Unilever dividend yield of 3.58% might not set the world on fire. But I’d rather have a steady yield that I can depend on instead of a 20% yield that could be cut next week.
The risk in applying this screening is that I simply can’t say what could happen to specific companies in the future. Tobacco products have been popular in recent decades. But could a push towards cleaner living diminish demand for British American Tobacco by the time I reach retirement age?
Income shares with a defined policy
Another way of finding pedigree is finding stocks that tie in profits to the dividend policy. Some companies will have a mandate whereby they pay out a set percentage of profits as a dividend. This is a great concept for an income investor. As long as the company performs, I’ll be sure to receive a cut via the income payout.
For example, Anglo American has a 40% payout policy. So even though the dividend was cut recently following results, this was only due to profits falling by a similar amount. I’d be happy to add this to my portfolio, even with the fluctuations in the dividend per share.
Admiral is another stock that I’d include for retirement income. It has an even more generous 65% payout policy on post-tax profit. Given the nature of the insurance market, the low volatility around cash flow generation from premiums makes it an appealing company to include.
Risks to note
As ever, dividend income isn’t guaranteed in the same way that interest on a bank account or a bond coupon is. It’s at the discretion of the management team whether to pay one or not. Even with a payout policy, if the business loses money, I’ll likely not get any money that year.
Therefore, trying to forecast decades ahead is very difficult. However, I feel the above stocks are good examples of what I should be buying now, hence why they are on my watch list to buy!
