Forget the State Pension or a Cash ISA! I’d live off these 7.7% yields for my retirement

With these dividends and a great track record, the Aviva share price is a steal, says Tom Rodgers.

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The paltry State Pension will have you living on the breadline if that’s all you’ve got for your retirement. Having just £168.80 a week to cover bills, food and everything else will be no fun at all.

Even worse, if you’ve been self-employed or you’ve missed a few years of National Insurance contributions, you could get even less than the headline rate.

As you approach retirement, you should be feeling free and happy, perhaps sipping a gin and tonic as you watch the garden grow. But money worries can quickly drag you down.

Another way

The very best rates in a Cash ISA will get you just 1.75% to 2% interest at present. Putting £10k in a Cash ISA will add just £3.84 a week to your pension pot. Why bother?

Instead of fretting about poverty, I say there’s a simple approach to boosting your earnings. Open a Stocks and Shares ISA and choose wisely by picking shares in stable, multinational, diversified companies that pay good dividends so you can live off the income.

Start making money today

I love boring, well-run businesses that underpromise and overdeliver. They make far more money for me than gobby, flash in the pan, all-mouth-and-no-trousers pretenders like Sirius Minerals.

I’d invest that £10,000 in a high-yield dividend-paying stock like Aviva (LSE:AV) instead.

At today’s share price of 382p, you’ll get 2,850 shares or thereabouts. Aviva’s dividend per share for the year ending 2018 was 19p. At the end of the year you’ll add £541.50 to your initial capital.

Now the clever bit. Aviva has an extremely attractive 7.8% dividend yield at the time of writing. It has also increased its dividend by over 10% a year since 2014. It’s a globally diversified business which credit ratings agencies say is A-rated to meet policyholder obligations, with plenty of free cash flow to reward shareholders.

Hang on to your investment and based on current trends, the following year you’ll get not 19p a share in dividends, but 20.9p (10% x 19p = +1.9p) a share. That’s £595.50 for the year. So you’ve made over a grand in two years.

The Aviva share price fell by 11% in August, but has since bounced back. I’m not concerned about the slide because the insurance giant has solid fundamentals, with recent half-year results showing incremental gains: operating profits ticked 1% higher and earnings per share notched up a 2% gain. “First and foremost, we’re ready and we’re resilient,” says CEO Maurice Tulloch, who I believe has performed admirably so far in his post.

Reinvest the best

Even better, if you’re not retiring in the next couple of years and you’ve got a little bit of breathing room, instead of skimming off the income, I’d reinvest those dividends to buy more company stock.

Compound your gains and you’ll get rich slowly. Even the once-heralded fund manager Neil Woodford has now performed an about face and dropped risky small-caps in favour of proven long-term FTSE 100 dividend payers like BT and Imperial Brands.

When years have passed and all the kerfuffle over Brexit seems like a distant dream (or nightmare) from another lifetime, I’d wager this dividend stock is still paying out the reliable money you need for a happy retirement.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Tom has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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