When I stop working I want to generate a comfortable passive income from dividend-paying UK blue-chip stocks. Since my planned retirement date is now only a dozen years away (it sneaks up), I can’t afford to hang around. Now’s my chance and I’m going to grab it with both hands.
That’s all sounds a bit dramatic, but I don’t think I’m over-egging it. While I’ve been investing in a Stocks and Shares ISA for years, my portfolio isn’t big enough to generate the income I need to top up my State Pension.
This is the hour
I also have some legacy company and stakeholder personal pensions, which I’ve recently converted into a self invested personal pension (SIPP). So I’ve got more cash than usual at my disposal.
Stock markets have been volatile lately, but I think this is working in my favour. It means that a bunch of solid FTSE 100 stocks are trading at dirt cheap valuations while offering dizzying levels of dividend income.
Shares in insurer Phoenix Group Holdings, to take the most glaring example, currently trade at just 5.7 times earnings. A price-to-earnings ratio of 15 is generally seen as offering fair value so that’s cheap. Better still, it yields a staggering 10.96%, easily beating the FTSE 100 average of 3.7%.
Cigarette maker British American Tobacco has a similar profile. It trades at 6.7 times earnings and yields 8.69%. Housebuilder Barratt Developments is also cheap trading at 6.3 times earnings and yielding 8.01%. I could name plenty more in a similar position. And right now, I’m buying as many as I can afford.
The joy of transferring insurance company pensions into a SIPP is that I’m free to make my own investment decisions. I’m looking to build a portfolio of around 15 different FTSE 100 stocks, to spread my risk.
Dividends are never guaranteed, and ultra-high-yielders like the ones I’m targeting are often the most vulnerable. I’m doing my due diligence on that front, though. For example, I’m shunning Vodafone Group, as I think it’s 10.21% yield looks shaky.
Unleash those dividends
I’m also wary of BT Group. It looks irresistibly cheap trading at 5.9 times earnings and it yields 6.68%. But the company has been struggling for years, and has a huge debt pile and massive pension scheme commitments. Too risky for me.
Building wealth through dividend stocks takes time. None of my picks are suddenly going to shoot the lights out, share price wise. The majority of my total return is likely to come from my reinvested dividends. Ideally, I’d do that for 30 or 40 years, but now I’ve only got 12 years left and I need to get my skates on.
Naturally, there’s no guarantee that the FTSE 100 will recover in the immediate future. There are a lot of worries out there. However, I’m hoping the outlook will steadily brighten over time. The sooner I invest my money, the sooner I can start reinvesting those dividends, and the more passive income I will generate.
