There’s no one-size-fits-all approach to creating long-term wealth with UK growth and dividend shares. However, if I were starting to invest today, I believe this strategy could help me build a large nest egg for retirement.
Cut costs and tax
Before looking at any particular shares, I’d think about what investment product to buy to help me reach my goals. Even if I pick the right stocks, I can substantially limit my eventual returns by not thinking about reducing costs and taxes.
Here’s the first thing to remember. Trading fees and other costs can differ significantly from broker to broker. Share purchase costs at Hargreaves Lansdown, for instance, can be as high as £11.95 for each trade. At Trading212, equity trades cost nothing.
For active investors, this can over time seriously eat into returns. Not that I’m saying low-cost brokers are the better choice however. Some platforms offer services and a trading experience an individual may be willing to pay for.
I can also maximise my trading profits by using tax-efficient financial products. The Stocks and Shares ISA, for instance, allows someone to buy £20k worth of securities each tax year without having to pay tax on capital gains and dividends.
This could save me thousands of pounds in just a single year.
The annual allowance on a tax-efficient Self-Invested Personal Pension (SIPP) can be even higher. This is equivalent to an investor’s annual income, up to maximum of £60k.
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.
A £54,252 passive income
Next, I’d look to build a diversified portfolio of FTSE 100 and FTSE 250 shares. The benefits here would be twofold. I could target stable earnings from the Footsie index of mature companies, as well as significant capital gains from hundreds of mid-cap growth stocks.
In recent decades, the FTSE 100 has delivered an average annual return of 8%. The FTSE 250, meanwhile, has produced a return closer to 11%.
With an equal amount invested across these indices, I could enjoy an average yearly return of around 10%. It’s the sort of return that could provide me with a healthy passive income in retirement.
Let’s say I spend £400 a month to build my portfolio. After 30 years I would have, based on that figure of 10% (and with dividends reinvested), a portfolio worth an outstanding £904,195.
If I then reinvested this into dividend shares with a yield of 6%, I would enjoy an annual second income of £54,252. That’s assuming the City’s dividend forecasts are correct.
A FTSE 100 hero
Unilever‘s (LSE:ULVR) one FTSE 100 share I’d buy to help me reach this target. Diversification is important to help me make reduce risk and enjoy a smooth return over time. And this company has this in spades.
Not only does it make a wide range of products (from soap and bleach, to mayonnaise and deodorant). It also sells its products into 190 countries worldwide. This protects group earnings from weakness in certain territories or within particular product categories.
Competition’s intense, as is the risk of losing shares to less pricey or own-brands. But Unilever’s broad range of ‘power labels like Lynx and Persil reduces this threat. It also provides excellent pricing power to help the business grow earnings even when costs rise.
The post Here’s how I’d target a passive income of £54,252 with UK dividend shares appeared first on The Motley Fool UK.
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More reading
3 passive income stocks I’d buy as a lower-risk investor
How I’d invest £250 a month for long-term passive income
Up 20% in a year and I think the Unilever share price can keep on climbing!
£7,000 to spare? Here’s how I’d try and turn it into a £500 monthly second income
Revealed! The 10 top-performing FTSE 100 shares in 2024
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Unilever. 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.
