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These days, one earnings stream isn’t enough, you ideally need a second income too. That’s even more important when you retire, because anybody who relies purely on the State Pension is going to struggle.
As the economy slows and the nation ages, it will come under pressure like never before, and now the State Pension Triple Lock growth mechanism is under threat too.
To combat this, I’m looking to build a passive income by buying shares in FTSE 100 and FTSE 250 companies inside a Stocks and Shares ISA. They offer potential share price growth and regular dividends, which can be drawn as income in retirement. Inside an ISA, that income is entirely free of tax. HMRC can’t take any of it.
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.
Today, the new State Pension is up to £12,537 a year. So how much would you need in an ISA to generate double that, and get £25,094 a year?
FTSE 100 dividends work wonders
If your shares yielded on 5% a year, you’d need £501,880. That sounds like a huge amount, but you don’t have to find it all at once. Suppose you have 30 years to invest, your portfolio delivers average annual growth of 8%, and you increase your contributions by 3% a year.
You could aim for that by tucking away £250 a month in year-one. You need to stick with it, and resist the temptation to raid your pot. Compound growth works wonders, but it needs time.
The average FTSE 100 yield is only 3%, but investors can generate more income by hand-picking shares. Simply chasing the highest yield isn’t the answer. You need companies strong enough to keep generating the cash required to maintain those payouts.
Standard Life offers income and growth
FTSE 100 insurer Standard Life (LSE: SDLF) has a solid dividend record. Until recently known as Phoenix Group, it has increased shareholder payouts every year for a decade. The trailing yield‘s now around 6.64%, one of the most generous on the blue-chip index. Its shares have grown too, up 30% over the last year.
Standard Life’s a savings and income specialist, providing workplace and retail pensions, annuities and other retirement products. 2025 results showed adjusted operating profit rising 15% to £945m, while operating cash generation increased 5% to £1.47bn. Most importantly for dividend investors, its shareholder capital coverage ratio strengthened to 176%, comfortably within its 140%-180% target range.
That gives me confidence that the dividend’s sustainable, although future increases are expected to be a modest 2% a year.
High-and-rising yield
Standard Life operates in a highly competitive market and needs to keep finding new business to replace older policies and keep cash flowing. Higher interest rates, volatile markets and changing pension rules could also cause problems.
The shares have slipped lately, which could offer a buying opportunity. Today’s price-to-earnings ratio of 16x isn’t exactly cheap, but neither does it look excessive for a company with this level of income and capital strength.
I think Standard Life is one to consider as part of a balanced portfolio of income-focused FTSE stocks. And I can see several other UK dividend shares worth considering today…
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Harvey Jones owns shares in Standard Life.
This story originally appeared on Motley Fool
