The UK State Pension offers tremendous value for money. In theory, for those earning the absolute minimum for 35 years, National Insurance contributions (NICs) of just £7,329 could be enough to unlock the full entitlement, which is currently (2026-2027 tax year) £241.30 a week.
More realistically, for those on the UK’s current average salary of £39,039, NICs of £252,818 would be required. Either way, experts reckon the pension’s not large enough to provide for a decent retirement. However, I think there’s a possible solution available.
What approach could be taken?
One idea is to build a sufficiently large portfolio of shares — using a Stocks and Shares ISA — that when retirement age is reached, can be used to buy a selection of high-yielding dividend stocks. The income from these could supplement the State Pension. That’s what I’m trying to do, anyway.
But how much is needed? According to Pensions UK, to have a moderate retirement, a single person requires £32,700 a year. The full State Pension is currently £12,548 so that leaves a £20,152 shortfall.
But a £503,800 portfolio of dividend shares paying 4% would produce £20,152 a year. A higher yield would require a smaller portfolio, as follows:
- 5%: £403,040
- 6%: £335,867
- 7%: £287,886
However, are returns like these realistic? I think so. For example, there are currently 67 shares on the FTSE 350 that are delivering 5% or more.
Of course, dividends are never guaranteed. However, history tells us that some of them will be maintained.
One I own…
For example, Supermarket Income REIT (LSE:SUPR) is currently (13 September) yielding 7.52%. It owns a portfolio of supermarkets in the UK and France, which it leases to blue-chip tenants.
With a yield like this, to achieve our income target of £20,152, £267,979 of the stock would needed. As an example, investing £274 a month for three decades — at 6% a year — could achieve this.
For those unfamiliar with this type of corporate structure, a REIT (real estate investment trust) doesn’t have to pay tax as long as it returns at least 90% of its rental profit to shareholders each year.
Generally speaking, this means their dividends tend to be higher than more conventional companies where a payout ratio of around 50% would be considered generous. However, to pay a dividend, a REIT needs to be profitable so there can be no guarantees.
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.
A quick overview
Threats to Supermarket Income’s dividend include higher interest rates (it usually borrows to buy more properties) and an economic slowdown that could lead to some of its tenants going bust.
However, the REIT has an excellent track record of increasing its annual dividend, which is typically paid in quarterly installments:
- Year ended 30 June 2018 (FY18): 5.5p
- FY19: 5.632p
- FY20: 5.799p
- FY21: 5.86p
- FY22: 5.94p
- FY23: 6p
- FY24: 6.06p
- FY25: 6.12p
Impressively, it hasn’t had any bad debts since being listed. Moreover, 80% of its income comes from inflation-linked leases and it has a weighted average unexpired lease term of 12 years. This gives it good visibility of its future income.
For these reasons, I own the stock and others could consider doing so too. However, experienced investors know that it’s better to hold a diversified portfolio of shares rather than just one. Fortunately, Supermarket Income isn’t the only stock with huge income potential.
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James Beard owns shares in Supermarket Income REIT.
This story originally appeared on Motley Fool
