With the State Pension currently amounting to around 30% of the average UK salary, it’s unlikely to meet the needs of most individuals in the long run. Furthermore, with the State Pension age set to increase to 68 over the longer term, people seeking to retire in their 50s, or even early-to-mid 60s, may find it increasingly difficult to do so.
One potential solution could be FTSE 100 dividend shares. Even though the index has risen significantly over recent years, there still appear to be a number of stocks that could offer high and stable income returns in the long run. Here’s how an investor could capitalise on the dividend opportunity which the FTSE 100 seems to offer.
Defensive profiles
Assets such as cash, bonds and property offer greater stability than shares. As such, they are often viewed as being preferable to FTSE 100 stocks, since they can mean lower volatility and less time spent worrying about capital values.
The reality, though, is that a number of FTSE 100 dividend shares could offer stable returns in the long run. Certainly, there’s always the potential for share price falls. But in a number of cases there are wide margins of safety on offer which suggest that the risk/reward ratio is in the investor’s favour at present.
Furthermore, many shares have business models that are relatively stable. For example, they may have track records of resilient financial performance, as well as business models that suggest their future prospects may be robust. This could provide them with a higher chance of delivering rising dividend payouts, as well as improved prospects of being able to afford their current level of dividends.
Risk reduction
Clearly, buying a small number of shares with the aim of topping-up the State Pension is a risky move. Company-specific risk would be high in such a scenario, which means that negative news from one stock could have a significant impact on the performance of the total portfolio. Diversifying among a wider range of shares which operate in industries that provide greater defensive attributes, as opposed to more cyclical industries, could be a shrewd move.
Focusing on the geographic exposure of the companies held within a portfolio may also help to provide a stronger risk/reward ratio over the long run. While it may be tempting at the present time to focus exclusively on shares which have minimal operations in the UK due to Brexit risks, the reality is that the pound could feasibly strengthen if Brexit has a positive impact on the economy. This could leave investors in international shares with a negative currency outlook. As a result, having a mix of UK and international shares may be a better idea.
Outlook
With the State Pension already inadequate for most people, and set to become less appealing as the age at which it is paid rises in future, FTSE 100 dividend shares could provide a boost to an individual’s retirement income. Although not without risk, the return potential from the index seems to be high, while reducing risk through diversification could help to improve the long-term prospects for an investor.