What would it take for someone to try and earn the same amount each week on average from dividend shares as the current State Pension?
Let’s find out!
Matching the State Pension
Different people earn different amounts in a State Pension, based on factors like how many years of National Insurance payments they’ve made.
At the moment, the full basic state pension’s £241.30 per week, or just under £12,550 per year.
How much someone would need to invest in dividend shares to try and earn that amount from them (in addition to their State Pension entitlement) depends on the average yield of the portfolio.
At the current FTSE 100 yield of 3.1%, it’d take a portfolio close to £405k. At 5%, that’d drop to around £251k.
Taking a long-term approach to financial planning for retirement
Put like that, it may sound daunting.
But retirement’s something that a lot of people think about in advance and can take a long-term approach towards.
So, for example, say someone decided to put £1,000 a month into their Stocks and Shares ISA and was able to compound it at 5% annually. Doing that, within 15 years, the ISA ought to hit the target size.
With a Self-Invested Personal Pension (SIPP), the pace could be even quicker. Thanks to tax relief, that monthly £1,000 would actually translate into £1,250, allowing the 15 year timeframe to be shortened by a couple of years.
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.
Choosing the right shares is important
That’s the maths. How might it look in practice, though?
The first step would be choosing the right platform to invest through.
While the tax relief element of a SIPP can be attractive, there are other pros and cons to a SIPP — as indeed there are to a Stocks and Shares ISA. So an individual investor will need to decide what’s the best platform for them, then compare potential providers.
After that, they need to get into a habit of regular contribution. That could involve less or more than in my example above but the timeline to achieve their goal would be correspondingly longer or shorter (if putting in more, there is also an upper limit for annual contributions to bear in mind).
They can then start to build a diversified portfolio of shares that hopefully can help them achieve their goal of matching the state pension with dividend income over time.
A share to consider
One FTSE 100 share I think merits consideration is British American Tobacco (LSE: BATS), at least for investors who do not shun tobacco-related shares on ethical grounds.
The owner of Lucky Strike, Pall Mall, and other brands is a cash generation machine thanks to its premium brand portfolio, global reach, low manufacturing costs, and strong distribution network.
That cash generation capability’s enabled the firm to grow its dividend per share annually for decades. It aims to keep doing so, though dividends aren’t ever guaranteed at any business.
Declining cigarette usage is a key risk. Revenues are falling already. That could continue, posing a risk to profits too.
But the company has been navigating weakening demand for decades already and yet remains strongly cash generative.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
