Based in London, Edward is a freelance investment analyst/writer who has clients all over the world. Before launching his own investment content business in 2017, he spent 15 years working in private wealth management and institutional asset management in the UK and Australia.
Edward is a passionate investor himself and manages his own global stock portfolio. His stock-picking strategy combines ‘growth’, ‘quality’, and ‘thematic’ approaches.
Edward holds a Commerce degree from the University of Melbourne, as well as the Investment Management Certificate (IMC) and the Chartered Financial Analyst (CFA) qualification. You can find him on Substack @topshelfinvestments
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Dividend stocks can be a powerful retirement income tool. These stocks – which pay out money to shareholders on a regular basis – can potentially generate quite a big cash flow.
Here, I’m going to highlight three UK dividend stocks I’d buy if I was approaching retirement. I reckon these companies – which currently offer yields of between 4% and 9.5% – could be great long-term investments for me in my golden years.
A lower-risk stock
If I was nearing retirement, I’d want to own a lot of stable sleep-well-at-night dividend stocks. And one name that fits the bill here is Unilever (LSE: ULVR).
A leading consumer goods company, it tends to generate fairly stable revenues and earnings no matter what the economy’s doing. As a result, the stock’s much less volatile than the broader UK market.
This is illustrated by its ‘beta’ of 0.4. This metric indicates that for every 1% move in the UK market (up or down), Unilever shares typically only move around 0.4%.
As for the dividend yield, it’s around 4% today. That’s not the highest yield around. But held in a Stocks and Shares ISA, it could be completely tax-free.
Please note that tax treatment depends on the individual circ*mstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The main risk with this company, to my mind, is that consumers ditch Unilever’s brands (Dove, Hellmann’s etc) for cheaper ones. In today’s high-interest-rate environment, we can’t rule this scenario out.
With the stock trading at a very reasonable valuation (the P/E ratio is just 16) however, I like the risk/reward proposition today.
Rising income
Another stock I’d choose for its stability and safety is Tesco (LSE: TSCO). Like Unilever, it has a stable business model (people always need to eat). And the stock is much less volatile than the overall UK market. Its beta is around 0.6, meaning the stock is also in the sleep-well-at-night camp.
As for the prospective dividend yield here, it’s currently about 4.5%, which is decent. And analysts expect the payout to rise in the years ahead.
I also see the potential for share price appreciation. That’s because the stock’s currently trading at a very low valuation (the P/E ratio is just 11).
That said, the cost-of-living crisis is a risk here too. It could result in consumers turning to lower-cost supermarkets such as Lidl and Aldi.
A high yield
Finally, I’d go with banking giant HSBC (LSE: HSBA). Now this stock is riskier than the other two. That’s because banking is a cyclical industry.
However, I like the long-term story here. In recent years, the bank’s shifted its focus to higher-growth areas such as Asia and wealth management. So I reckon it’s well positioned for the future.
As for the dividend, it’s very attractive at the moment. Last year, the bank paid out 61 cents to investors, which equates to a yield of 7.5% today. This year however, the company looks set to make a special payment, taking the total payout to around 76 cents – a yield of around 9.5%.
Given that Unilever and Tesco are lower on the risk spectrum, I’d be willing to take on the added risk of this stock to pick up the high yields on offer.
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of return on investment, the withdrawals will consist primarily of interest and dividends. Experts disagree on whether the 4% rule is the best option.
A smart strategy for people who are still saving for retirement is to use those dividends to buy more shares of stock in firms. That way, they will receive even more dividends and be able to buy even more shares.
As Benzinga explained, to calculate your estimated investment value you need two variables: your desired annual earnings target ($12,000) and the dividend yield of the stock (0.73%). Here's the formula: $12,000 / 0.0073 = $1,643,835.62 to generate an income of $1,000 per month.
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
For retirees seeking a reliable income stream, dividend-paying stocks can be beneficial as they provide a source of passive income. Over recent years, dividend stocks have demonstrated considerable returns.
A Dividend Portfolio Preserves Your Retirement Savings:
Ideally, the portfolio can be created in such a way that you can live off a dividend stream of payments without withdrawing from your principal balance. The strategy helps you avoid dipping into your savings thus helping your retirement funds last longer.
Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits. See What Income Is Included in Your Social Security Record for more information.
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
As long as a company continues to thrive and your portfolio is well balanced, reinvesting dividends will benefit you more than taking the cash will. But when a company is struggling or when your portfolio becomes unbalanced, taking the cash and investing the money elsewhere may make more sense.
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
The Procter & Gamble Company (NYSE:PG), AbbVie Inc (NYSE:ABBV), Colgate-Palmolive Company (NYSE:CL), and PepsiCo, Inc.(NASDAQ:PEP) are some of the best dividend growers to consider for retirement as these companies hold decades-long dividend growth streaks and have strong balance sheets.
Other drawbacks of dividend investing are potential extra tax burdens, especially for investors who live off the income. 3 Once a company starts paying a dividend, investors become accustomed to it and expect it to grow. If that doesn't happen or it is cut, the share price will likely fall.
This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return — and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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