I’m investing flat out in high-yielding FTSE 100 dividend stocks with the aim of building a passive income to supplement my State Pension in retirement. I think this is a brilliant time to go shopping for UK shares, as they’re now among the cheapest in the world.
Insurer and fund manager Legal & General Group is a stunning example. It currently yields 7.71% but trades at just 6.56 times earnings. The company hopes to generate up to £9bn of cash between 2020 and 2024. Yet investors are wary, with the L&G share price rising just 0.32% over the last 12 months.
This is just one example of the great value lurking in the FTSE 100. Buying underpriced blue-chips today means I will benefit if their share prices recover. I’ll also reinvest all of my dividends to build my stake and turbocharge growth.
Building wealth over time
I’ve been doing this for years but if I was younger and just starting out with £5k at my disposal, I’d aim high. That initial lump sum would only be the start. I’d split it equally between L&G and Lloyds Banking Group, another dirt-cheap FTSE 100 stock that trades at just 6.59 times earnings. It currently yields 5% a year but that’s forecast to rise to 5.81% in 2023 and 6.31% in 2024.
L&G and Lloyds would generate an average yield of 6.36%, worth £318 in year one. Any share price growth would be on top of that.
Once I’d bought my first two stocks, ideally in a Stocks and Shares ISA, I’d start building up my ammunition to buy more shares. Let’s say I started with my £5k then invested another £200 a month, and increased that contribution by 5% a year to maintain its value.
The average long-term return on the FTSE 100 is just shy of 7% a year. If I matched that, I’d have £289,212 after 25 years. If my portfolio still yielded 6.36% at that point and I took all of my dividends as income, I’d be earning £18,394 a year.
That’s retirement sorted
Personally, I’d hope to generate a better return than 7% a year, by hand picking a portfolio of my favourite income-generating stocks. If I got an average annual return to 10%, I’d have £447,446 after 25 years. With the same 6.36% yield, my second income would jump to £28,458 a year.
Now 25 years may seem a long timescale, but that’s how equity investing works. It isn’t about making quick returns overnight. The wealth builds, slowly and bumpily, over time. Given an average working lifetime of around 40 to 45 years, people who start early should have even longer to build their retirement wealth. Provided they take action.
Of course, there are risks. My stock picks may underperform. Markets may do poorly generally. I may have to raid my savings to fund more immediate needs (something I’d only do in an emergency). Yet if I can last the course, I’d be confident of building the high and rising passive income I need to enjoy my final years. All starting with just £5k.
