Image source: Getty Images
Lots of people would like more money when they retire. However, there is a difference between wanting something and having a plan to achieve it in practice. The current full State Pension rate in the UK is £230.25 a week.
How difficult would it be to earn that much over again by investing in dividend shares?
Starting with a target in mind
To put that in perspective, the full UK state pension amounts to an annual sum of almost £12,000.
Earning £12k a year from dividend shares would depend on a few factors, but to start with, let’s consider the maths.
The current FTSE 100 dividend yield is 3.3%. I think it is possible to get a meaningfully higher yield than that. But risk management is top of many people’s minds when it comes to their pension – understandably – so in this example I will use a yield of 4%.
To earn £12k at a 4% yield would require a £300k investment pot.
Letting time help you
That could be a lump sum.
But it is also possible to build up to that amount over time, by reinvesting dividends (something known as compounding).
Investing £20k a year and compounding at 4% annually, after 12 years the investment pot would already be worth more than £300k. It is possible with a smaller annual contribution, by the way, but would take longer.
Being a good investor
There can be tax benefits to investing through a SIPP or Stocks and Shares ISA. So it makes good sense to spend time choosing the right one.
Please note that tax treatment depends on the individual circumstances 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.
Dividends are never guaranteed, and falling share prices could also hurt the value of the portfolio, so the smart investor will diversify and choose shares carefully.
On the hunt for dividend shares
Fortunately I think there are lots of good options in the market.
For example, one share I think investors should consider when trying to build income beyond the UK state pension alone is British American Tobacco (LSE: BATS).
It is the owner of brands such as Dunhill and Pall Mall. Cigarettes are huge business and thanks to a combination of low manufacturing costs and high selling costs, they are very lucrative.
That is why British American is able to generate large amounts of excess cash it can use to fund its dividend.
The company aims to grow its dividend per share annually and has consistently done so this century.
Can that last, given the sharp fall in cigarette smoking seen in many markets?
I see that as a risk to British American’s dividends, but think it can possibly keep growing its shareholder payout regularly due to a combination of price rises on cigarettes and extending its sales of other forms of nicotine products such as vapes.
