Generating a reliable passive income stream in retirement is a goal for millions. In my view, one of the best ways to achieve this is through a Stocks and Shares ISA.

By selecting the right dividend stocks, it’s possible to build a portfolio capable of delivering an impressive £24,000 a year in tax-free second income. So how much would an investor need to put in to achieve that?

It depends on how much the portfolio yields. Let’s say we targeted 5%, a figure achievable through a carefully selected blend of FTSE 100 and FTSE 250 dividend stocks. That requires a total pot of £480,000.

Someone who built a balanced portfolio of shares with a lower average yield of say 4%, would need £600,000.

A retirement built on dividends

It’s possible to find blue-chips yielding as much as 8% or 9% a year, but I wouldn’t suggest putting an entire portfolio in them. Ultra-high yields can prove unsustainable in the longer run.

Right now, FTSE 100 supermarket J Sainsbury (LSE: SBRY) has a dividend yield of exactly 5%. That’s bang on the nose.

Its forecast to hit 5.2% this year, then 5.4% in 2026. That’s the beauty of a good dividend stock. The board will aim to increase shareholder payouts every year, as profits rise. Assuming profits do rise. No guarantees. On the FTSE 100, Persimmon, Rio Tinto and Vodafone have cut dividends in recent years.

As the UK’s second-largest grocer (after Tesco), Sainsbury’s benefits from consistent consumer demand and a strong market position. I remember eating its own-brand baked beans as far back as the 1970s. Supermarkets are seen as defensive stocks. People still need to eat in economic downturns.

That said, when people have less money in their pockets, they’ll still cut back on food. Plus Sainsbury’s now owns Argos, which has struggled lately, and faces intense competition from Amazon and others.

But with luck, Sainsbury’s investors should get share price growth. The Sainsbury’s price is up just 1.5% over the last year, but a more impressive 30% over five years. All dividends are on top. The total return could be closer to 60%.

Sainsbury’s is well worth considering for a diversified, dividend-focused ISA. But it shouldn’t be the only stock. Personally, I’d aim for 15 to 20 different shares.

Building a diversified portfolio

I’d also diversify across multiple industries. Sectors such as consumer staples, utilities and financials tend to provide reliable dividends. Unilever, National Grid and Legal & General are worth considering.

Reinvesting dividends, at least initially, could accelerate portfolio growth. So how long would it take to save £480,000?

Obviously, that depends on how much the investor pays in. Someone who is 30 years from retirement could hit that target by investing £400 a month. This assumes an average annual total return of 7% a year, with dividends reinvested, roughly in line with the long-term FTSE 100 average.

If they only had 20 years at their disposal, they’d have to up that contribution to £925 a month. No time to lose. To bag passive income, it pays to get active as soon as popssible.

The post Passive income of £24,000 a year from an ISA? Here’s how an investor could get that appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harvey Jones has positions in Legal & General Group Plc and Unilever. The Motley Fool UK has recommended Amazon, J Sainsbury Plc, National Grid Plc, Tesco Plc, Unilever, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m hunting for dividend income, and there are so many FTSE 100 stocks to buy offering sky-high yields that I’m getting a little dizzy.

I’ve just taken a gamble and bought housebuilder Persimmon, which at the time was yielding almost 20% a year. Not only that, it was trading at just five times earnings.

It still felt like a risky move, given that house prices are starting to fall as interest rates rise. Yet I’m betting that the shortage of property supply should sustain demand. Also, mortgage rates may not rise as much as we expected just a couple of weeks ago.

Top income stocks to buy

Persimmon’s dividend cover is thin at 1.1% but even if management does cut its shareholder payout, it should still be pretty substantial.

At the other end of the risk spectrum, I think it is nearly always a good time to buy shares in National Grid. This is one of the most solid income stocks on the FTSE 100, supported by its regulated earnings, while exposure to North-Eastern US energy market gives it a bit of buzz.

The 5.3% yield is only covered 1.2 times but this is less of an issue with utilities, as their earnings are more secure so they can pay out more of them. National Grid’s shares are valued at 15.6 times earnings, pretty much in line with the long-term average.

Supermarket chain Sainsbury’s has just reported a 29% drop in first-half profits to £376m as grocery prices rocket and consumer incomes plunge. However, last week’s results got a positive reception, as group revenues rose 4.4%.

I expect Sainsbury’s to continue struggling, as the cost-of-living crisis drags on and German discounters Aldi and Lidl continue to grab market share. Yet I am relatively confident about its dividend. This is now the main reason to hold the stock, and management will be reluctant to cut it.

I’m hoping that won’t be necessary, anyway, as its attractive 6% yield is covered 1.9 times by earnings. Trading at just 8.6 times earnings, many of the challenges Sainsbury’s face are in the share price.

Dividend investors spoilt for choice

Aviva’s shares have finally come alive after years of going sideways, bouncing 12% in 12 months. It’s the dividend that matters here, though, and the stock currently yields a whopping 8.8%, nicely covered 1.5 times by earnings.

The Aviva share price doesn’t exactly look expensive, either, trading at 7.5 times earnings. It is not the most dynamic stock on the FTSE 100, but I would still want it as a cornerstone of my portfolio. Today’s entry price looks attractive to me.

Finally, I’d like to add a commodity stock to my list of stocks to buy for sustainable income, and I’m plumping for Anglo American. The mining sector has picked up in recent days, as hopes grow that China is finally easing its Covid lockdowns. 

The upcoming global recession could squeeze demand for metals and minerals. Yet I’m not too worried, given that Anglo American’s 8.4% yield is covered 2.5 times, and the stock is valued at a dirt-cheap 4.8 times earnings. Anglo American is well worth its place on my list of best FTSE 100 dividend income stocks to buy today.

The post 5 stocks to buy for high and rising dividend income appeared first on The Twelfth Magpie.

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Harvey Jones holds shares in Persimmon. The Motley Fool UK has recommended Sainsbury's. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Now may look like a bad time to buy FTSE 100 shares, but I beg to differ. Today’s turmoil offers a brilliant buying opportunity, but with three provisos.

At The Motley Fool, we never like to waste a stock market crash. Or even a dip, like the one the FTSE 100 is suffering at the moment. 

The index of top UK shares has been relatively resilient in 2022. It is down 8.09% year-to-date while the US S&P 500 has crashed 23.49%. Yet the FTSE 100’s relatively smaller drop is still throwing up lots of share buying opportunities for me.

FTSE 100 offers me great value

When an individual stock falls sharply in value, I tread carefully. Usually that’s due to a bad piece of company news, such as a profit warning, reduced dividend, or some other nasty that weighs on its prospects.

When the whole FTSE 100 falls, it’s a different matter, as good companies are sold off with the bad. Investors are fleeing risk right now, as today’s problems aren’t going away soon. Post-Covid supply shortages, war in Ukraine, and (crucially) rising interest rates are combining to destroy investor sentiment.

These problems will hit some sectors harder than others. Housebuilders such as Barratt Developments will suffer as rising mortgage rates hit demand. So will asset managers such as Schroders, as markets go haywire. Supermarkets like Sainsbury’s are also suffering, as customers buy less or trade down.

By contrast, luxury goods maker Burberry Group is on safer ground as the wealthy are less affected by the cost-of-living crisis. So is spirits maker Diageo, as its customers need a stiff drink right now.

I’m focusing my attention on companies that have been hit hardest, as their share prices have fallen most. They offer a tempting combo of dirt-cheap valuations and astonishing yields. I’ve just taken a punt on housebuilder Persimmon. I’m worried I may regret this, but found its 19.49% yield and valuation of just 4.81 times earnings too ridiculous to resist.

I’m now caught between buying Tesco for long-term income and growth, or investing in Rolls-Royce shares in the hope they will lead the charge when markets recover.

Three ways I reduce risk

The big risk is that markets could fall further from here, but I’m happy to take that chance for three reasons. First, it’s impossible to buy right at the bottom of the market. Today’s lower prices are good enough for me.

Second, I’m building a balanced portfolio of FTSE 100 stocks on top of that, to turbo-charge my growth. I aim to hold at least a dozen, so if one or two fail to deliver, hopefully the others should more than compensate.

Finally, and most important, I’m only buying shares that I plan to hold for the long term. That means at least 20 years, which should give plenty of time for the FTSE 100 to rebound from its current troubles.

Sometimes I have to steel myself to click the ‘buy’ button but if I wait until after the FTSE 100 has recovered, then the same stocks should cost a lot more than they do today.

The post I don’t care if FTSE 100 shares fall further, I’m buying them today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Burberry, Diageo, Schroders (Non-Voting) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shoppers are tightening their purse strings and grocery and fashion chains are starting to feel the pinch. These three stocks are right in the firing line.

Hard cheese

Mid-market grocer J Sainsbury (LSE: SBRY) is on the slide again, its share price down 11% over the last three months. Latest results showed volume and transaction growth, notably in non-food, with clothing, general merchandise and financial services doing well. Unfortunately, this didn’t stop underlying profit before tax falling 13.8% to £587m, while earnings per share (EPS) fell 8.3% to 24.2p.

Even if food price deflation eases as management claims the ‘wages of thin’ will only drive more customers into the arms of the discounters. Wafer-thin grocery margins fuelled chief executive Mike Coupe’s pursuit of Argos and the question now is how well he can integrate his new purchase into the business and transform Sainsbury’s into a multi-channel operation. This is too big a gamble for me but investors will have much to cheer if Coupe pulls it off.

Fashion disaster

Fashion is an even tougher sector, judging by results at high street retailer Next (LSE: NXT), whose share price is down 20% over the last three months. Sales figures were hit by this year’s cold, wet March and April, which reduced demand for clothes compared to the previous year’s warmer spell. Although management warned that sales could decline further, recent warmer weather could brighten the outlook, at least in the short term. 

Nobody is in any doubt about the tough times facing Next, especially given growing online competition from the likes of Boohoo.com, which could challenge its early-mover status. Yet the business expects to generate £350m of surplus cash this year, and has been throwing money at shareholders, returning £181m via buybacks and paying a special dividend worth £88m in February. At 11.86 times earnings, brave investors might see this as an entry point, and with EPS forecast to pick up to 5% in 2018, there may be long-term rewards.

Out of style

Upmarket fashion retailer Burberry Group (LSE: BRBY) had a good financial crisis, its share price climb continuing as low interest rates and QE made the wealthy feel wealthier, while stimulus kept the Chinese growth story on the road. Its share price hit a high of 1,927p in February 2015 but it has been all downhill since then, with the share at just 1,139p today, a drop of 40% in just over a year.

The Chinese simply aren’t spending like they were, especially in Hong Kong and Macau, and on their shopping trips to Europe. This is a worry as latest Chinese economic figures for April show the economy continuing to slow. You might see the last month’s 15% share price drop as an entry point, taking the valuation to 14.55 times earnings against its long-term average of around 18 times. I see it as a sign of further trouble to come.

The post J Sainsbury plc, Next plc and Burberry Group plc suffer in retail sector rout appeared first on The Twelfth Magpie.

More reading

• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.