It’s a sad reality that the UK State Pension alone will not provide for a comfortable retirement. That’s why millions of people are looking to supplement their retirement income by investing in a Stocks and Shares ISA.
But how much would be needed to produce more than the UK State Pension which, for those with a full record of contributions, is currently £12,548 a year? Let’s see.
How do the numbers stack up?
The size of the investment pot required will vary with the level of dividends achieved. For example, a portfolio of dividend shares yielding 3% a year would require an ISA worth £418,267 to match the State Pension.
However, I think it’s possible to improve on this.
| Return | ISA value (£) |
|---|---|
| 3% | 418,267 |
| 4% | 313,700 |
| 5% | 250,960 |
| 6% | 209,133 |
| 7% | 179,257 |
| 8% | 156,850 |
For example, there are 40 stocks on the FTSE 350 that are presently (31 May) yielding 6% or more.
One of these is Supermarket Income REIT (LSE:SUPR). It’s presently offering a return (no guarantees, of course) of 7.4%. It owns and operates a portfolio of large grocery stores in the UK and France, which it leases to blue-chip tenants under long-term contracts.
To generate £12,548 in dividends each year from this stock alone, £169,568 of the trust’s shares would be needed. Having said that, I’m not advocating owning just one share. I believe a diversified portfolio is important.
A key pillar of our investment strategy is to invest in omnichannel stores. Omnichannel supermarkets provide in-store shopping, but also operate as last mile, online grocery fulfilment centres for both home delivery and click and collect.
Company website
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Should we be wary of a high yield?
Admittedly, a return that’s over twice the average of that for the UK stock market as a whole should be treated with caution. It could be a sign that investors are expecting a cut. Alternatively, a yield might be rising due to a falling share price, which could be an indication that there are other issues to worry about.
Indeed, the group’s shares have fallen by nearly a third over the past five years.
| Financial year | Dividend (pence) | Share price (pence) | Yield (%) |
|---|---|---|---|
| 30.6.21 | 5.86 | 117.5 | 5.0 |
| 30.6.22 | 5.94 | 119.5 | 5.0 |
| 30.6.23 | 6.00 | 73.0 | 8.2 |
| 30.6.24 | 6.06 | 72.5 | 8.4 |
| 30.6.25 | 6.12 | 84.9 | 7.2 |
My view
However, I see this as more of an opportunity than something to be too concerned about. That’s because I believe some of this apparent loss of investor confidence has been brought about by the post-pandemic higher interest rate environment, rather than anything specific to the trust’s operations.
Like most real estate income trusts (REITs), Supermarket Income uses debt finance to grow. Higher borrowing costs impact its bottom line and, potentially, reduces the scope for shareholder distributions. Despite current global uncertainty, I think interest rates will come down over the medium term.
Another potential issue is that the commercial property market can be highly cyclical.
But the trust has a solid track record in rising to these challenges. It’s grown its payout every year since listing. And I believe physical stores will continue to be needed for decades to come. As evidence of this, the REIT enjoys a 100% occupancy rate. In addition, it’s never had a bad debt since becoming a listed company.
For these reasons, I have Supermarket Income REIT in my own portfolio. Income investors could consider adding it to their own.
Should you invest £5,000 in Supermarket Income REIT Plc right now?
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James Beard owns shares in Supermarket Income REIT.
