Dividend stocks can be a useful source of extra income in retirement. While no investment is ever entirely without risk, some companies offer relatively dependable payments.
If I were about to retire, I’d be looking for companies with high dividend yields and relatively stable outlooks. In this regard, two UK shares stand out to me at the moment.
Legal & General
If I’d invested £1,000 in Legal & General (LSE:LGEN) in 1999, I’d have an investment today with a market value of around £1,230. In other words, the share price has increased by an average of under 1% per year.
That’s because most of the return has come from its dividends. At today’s prices, it has a yield of around 8%.
The company has also shown a responsible attitude towards its dividend over the last few years. It has increased it when it was able to, but took a pause during the pandemic to reassess the situation.
Things have been going well for Legal & General recently. Rising interest rates have allowed it to earn a stronger return on its assets and this trend looks set to continue, according to the company’s management.
There are always some risks when it comes to investing. In the case of Legal & General, the biggest of these comes from a change in CEO as the company’s highly respected leader steps down.
Overall, though, this looks like one of the most dependable income stocks for the near future. I think it could be a great choice for retirees looking for passive income.
Aviva
Aviva (LSE:AV.B) is another insurance company with a high dividend yield. But unlike Legal & General, I’m looking at the preferred stock, not the common equity.
Warren Buffett has invested in preferred shares at various times in his career. And it’s not that difficult to see why – they offer a much lower risk proposition than common stocks.
Payments to preferred shareholders have to be paid in full before common shareholders can receive any distributions. This means there’s less chance of preferred dividends being cut or lowered.
Of course, Aviva could pay no distributions to its shareholders at all – either preferred or common. But if it did, then missed payments on preferred shares have to be caught up in full before common equity dividends restart.
The risk with preferred shares is twofold. Their dividend payments can’t go up if the company does well and they can often have much lower trading volumes, making them difficult to sell.
Aviva’s preferred stock currently has a 7% dividend yield, though, which I think is attractive enough as it is. And for a retiree looking to keep the shares and collect passive income, selling difficulties don’t matter that much.
Investing for retirement
Each of the stocks I’ve highlighted here is in the insurance sector. Ideally, I’d like to diversify my holdings a little more.
As I see it, though, owning shares that offer reliable returns is the most important thing. And these are the shares with the combination of stability and high returns I’d look for if I were about to retire.
