If you’re 30 and have yet to start building a retirement fund, here’s some good news. Time is still on your side. And when investing, time counts.
You still have a mighty 37 years before you turn 67, giving you plenty of time to turn relatively modest monthly investments into a generous retirement income. The trick is to start now and give the miracle of compound growth decades to work its magic.
Buying FTSE shares in an ISA
At The Twelfth Magpie, we believe FTSE 100 and FTSE 250 shares are a terrific way to build wealth, because they offer investors potential capital growth when share prices rise, plus a regular stream of dividends.
Dividends can be reinvested while investors are building their pot, before eventually being used to provide an income in retirement. Investments held inside a Stocks and Shares ISA can grow free of UK income tax and capital gains tax.
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.
Let’s say our investor wants to generate £9,999 a year from their portfolio at 67. If their income-focused shares produce a 5% yield at that point, they’ll need a pot worth £199,980. That may sound like a lot of money today, but the investor has nearly four decades to get there.
Let’s assume their portfolio delivers an average annual total return of 7%, including reinvested dividends, and they increase their monthly contribution by 3% every year. They could target that £199,980 by investing just £105 a month in the first year.
There are no guarantees with investing. Markets can fall, companies can cut dividends and returns won’t arrive in a straight line. But over time, these risks should balance out. But which shares to buy?
Aviva offers income and growth
One FTSE 100 share I don’t hold but wish I did is Aviva (LSE: AV.). The insurer has produced an impressive return over the past five years, with the shares rising around 80%, plus creating a stream of dividends along the way.
Aviva currently offers a trailing dividend yield of 5.5%. The company also has a good track record of increasing dividends, and the yield’s forecast to hit 5.8% this year and 6.2% in 2027.
Aviva’s £3.7bn takeover of Direct Line has significantly expanded its UK general insurance operation. Management expects the deal to generate £225m of annual cost savings, although integrating a large acquisition always brings execution dangers.
Aviva also faces the usual insurance risks, including higher-than-expected claims and changing insurance prices. A weaker economy could also affect customer demand. Competition’s also intense. The shares have slowed lately, rising just 5% over the last year.
After its strong run, Aviva looks more expensive with a price-to-earnings ratio of 26.5. The forward P/E of 17.3 looks more reasonable, but still a little high.
I still think Aviva is well worth considering for the long term. But this FTSE 100 dividend share may offer even better value today…
What income stock do we like better than Aviva Plc right now?
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Harvey Jones does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
