The main reason I invest is to build a lifelong passive income to top up my State Pension and secure a comfortable retirement.
I don’t plan to touch my investments until I’m in my late 60s, to give them maximum time to grow. Someone who starts working in their early 20s potentially has 45 years to build up a decent retirement pot.
In my view, the stock market is the ideal way to build long-term wealth. In the short term, it’s volatile. But in the longer run, it delivers more income and growth than any rival investment, and with minimal effort.
I’m buying FTSE 100 dividend stocks
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I like to invest in FTSE 100 dividend stocks. As well as potential share price growth, they make regular cash payments to shareholders two or four times a year.
Dividends aren’t guaranteed, and rely on the company generating enough cash to fund them, but they keep my portfolio ticking over even when share prices are down, as they have been in recent weeks.
Today I reinvest every penny I receive into my portfolio to buy more of the company’s stock, but will draw it as income when I retire.
Investment manager M&G (LSE: MNG) is one of my favourite FTSE 100 income stocks. Over the last year, it has given me a dazzling 10.14% yield.
The M&G share price has dipped by 4.9% over the last 12 months amid concerns over the economic outlook, but that doesn’t worry me. I plan to hold the stock for years, or even decades, which allows me to look past short-term volatility.
Over two years, the stock is up 8.25%. That may not sound much, but throw in two years of dividends, and the total return is heading towards 30%. When the outlook improves and M&G shares (hopefully) recover, I should do even better.
I’m buying a spread of shares to reduce risk
M&G’s pre-tax operating profits fell 3.8% in the six months to 30 June. The board nonetheless also increased its capital generation target from £2.5bn to £2.7bn. If it succeeds, that should secure that bumper dividend.
The danger is that markets don’t recover, M&G’s profits and cash flows slide, and that sky-high dividend eventually becomes unsustainable. A cut would hit the share price too.
By spreading my risk across 15 to 20 companies, including some growth stocks, I’d hope to yield around 6% a year and enjoy capital growth of another 5%. That’s a total average annual return of 11%.
If I invested £5,000 and left it in the market for 40 years, I’d have £325,004. That 6% yield would give me income of £19,500 a year, and my capital — and income — could still grow.
If I paid in an extra £100 a month I’d have £1,099,996. A yield of 6% would give me a staggering £66,000 a year. That’s £5,500 a month.
Nothing is guaranteed. A total return of 11% is high end. Plus inflation will dent the value of that money. But I still think it’s a brilliant target to aim for and FTSE 100 shares are the way to go.
