Generating a reliable passive income stream in retirement is a goal for millions. In my view, one of the best ways to achieve this is through a Stocks and Shares ISA.
By selecting the right dividend stocks, it’s possible to build a portfolio capable of delivering an impressive £24,000 a year in tax-free second income. So how much would an investor need to put in to achieve that?
It depends on how much the portfolio yields. Let’s say we targeted 5%, a figure achievable through a carefully selected blend of FTSE 100 and FTSE 250 dividend stocks. That requires a total pot of £480,000.
Should you invest £1,000 in Sainsbury's right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Sainsbury's made the list?
Someone who built a balanced portfolio of shares with a lower average yield of say 4%, would need £600,000.
A retirement built on dividends
It’s possible to find blue-chips yielding as much as 8% or 9% a year, but I wouldn’t suggest putting an entire portfolio in them. Ultra-high yields can prove unsustainable in the longer run.
Right now, FTSE 100 supermarket J Sainsbury (LSE: SBRY) has a dividend yield of exactly 5%. That’s bang on the nose.
Its forecast to hit 5.2% this year, then 5.4% in 2026. That’s the beauty of a good dividend stock. The board will aim to increase shareholder payouts every year, as profits rise. Assuming profits do rise. No guarantees. On the FTSE 100, Persimmon, Rio Tinto and Vodafone have cut dividends in recent years.
As the UK’s second-largest grocer (after Tesco), Sainsbury’s benefits from consistent consumer demand and a strong market position. I remember eating its own-brand baked beans as far back as the 1970s. Supermarkets are seen as defensive stocks. People still need to eat in economic downturns.
That said, when people have less money in their pockets, they’ll still cut back on food. Plus Sainsbury’s now owns Argos, which has struggled lately, and faces intense competition from Amazon and others.
But with luck, Sainsbury’s investors should get share price growth. The Sainsbury’s price is up just 1.5% over the last year, but a more impressive 30% over five years. All dividends are on top. The total return could be closer to 60%.
Sainsbury’s is well worth considering for a diversified, dividend-focused ISA. But it shouldn’t be the only stock. Personally, I’d aim for 15 to 20 different shares.
Building a diversified portfolio
I’d also diversify across multiple industries. Sectors such as consumer staples, utilities and financials tend to provide reliable dividends. Unilever, National Grid and Legal & General are worth considering.
Reinvesting dividends, at least initially, could accelerate portfolio growth. So how long would it take to save £480,000?
Obviously, that depends on how much the investor pays in. Someone who is 30 years from retirement could hit that target by investing £400 a month. This assumes an average annual total return of 7% a year, with dividends reinvested, roughly in line with the long-term FTSE 100 average.
If they only had 20 years at their disposal, they’d have to up that contribution to £925 a month. No time to lose. To bag passive income, it pays to get active as soon as popssible.
