There’s no better way (in my view) to target retirement income than with UK shares. It can yield a regular stream of cash to pay for the essentials and life’s little — or big — luxuries. It can also lead to substantial portfolio growth, as no actual capital is being withdrawn for passive income.
Want to know how you could achieve a huge passive income with dividend stocks? Here are five steps to get started on your journey.
Trim tax
The first task is to reduce or eliminate taxes completely. Over time, the contributions you make to HMRC can significantly drain your wealth.
I love the idea of the Stocks and Shares ISA for this reason, and hold one myself. With these, no tax is paid on capital gains or dividends. The result is more cash in your pocket to boost compound gains.
Then when you’re ready to start drawing the dividends you receive, no tax is due on those either.
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.
Diversify for the win
The next step is to build a diversified portfolio. We’re talking about companies from different stock markets and which have exposure to a variety of regions and industries.
This can be achieved by buying individual shares. You can also utilise this strategy by taking positions in investment trusts and exchange-traded funds (ETFs).
A diversified approach can help you reduce risk while still targeting incredible returns. If you’d invested in a FTSE 100 ETF a decade ago, for instance, you’d have achieved an average annual return above 9%.
A top dividend opportunity?
A mixed portfolio should also comprise different categories of shares, namely:
- Growth shares for long-term capital appreciation.
- Value shares that can rise in value and protect you from market volatility.
- Dividend shares for solid returns across the economic cycle.
Let me tell you about Prudential (LSE:PRU), a share I hold in my ISA for passive income. Dividends are never guaranteed, and especially during economic downturns. In this regard, ‘The Pru’s’ track record of 22 dividend increases in 23 years deserves serious attention from investors.
Prudential’s confident it can keep this record going, pledging to keep raising payouts by at least 10% through to 2027. I’m hopeful it will too, given the firm’s strong balance sheet that’s also supporting share buybacks.
Prudential’s a market leader in life insurance, health insurance and asset management, and is focused on Asian regions where demand’s booming. It’s experiencing some problems in China right now, which could put a drag on profits near term. But this isn’t expected to derail its dividend growth story, and City analysts agree.
Consider high-yield shares
With a diversified portfolio like this, I think an average annual return of 9% is very achievable. This is important, as it could turn even a modest monthly investment like £300 a month into an impressive £549,223 after 30 years.
The question is, what kind of passive income could an ISA this size deliver? The answer is £38,446 tax free, if invested in 7%-yielding dividend shares.
Should you invest £5,000 in Prudential Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Prudential Plc made the list?
Royston Wild owns shares in Prudential.
