What’s the best way to build a passive income portfolio to fund an early retirement? Some people like investing in property, but it’s not for me. I prefer the low costs (and low hassle) of investing in UK dividend shares.
By holding my shares inside an ISA, I can also avoid paying tax on my dividends. Over time, I hope to build a share portfolio that will provide me with the income I’ll need to support my retirement. If things go well, I may even be able to retire early!
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.
How much will I need?
Everyone’s circumstances are different. But like many people, I hope my cost of living will be a little lower when I retire.
Industry estimates by the Pension and Lifetime Savings Association (PLSA) suggest three possible levels of disposable income too support retirement for a single person:
Minimum: £14,400 a year
Moderate: £31,300 a year
Comfortable: £43,100 a year
How much would I need to invest to generate this level of income from dividends? I’ve crunched the numbers on some examples.
FTSE 100 tracker fund
The FTSE 100 currently offers a dividend yield of 3.6%. If I put all of my investment cash in a low-cost FTSE 100 tracker fund today, this is what I’d need, based on the PLSA guidelines:
3.6% yield
Minimum
Moderate
Comfortable
Investment required
£400,000
£869,444
£1,197,222
To be honest, these numbers are higher than I’d hoped for. Fortunately, I think I can do better than this by investing in individual shares.
A 5% income portfolio
At the time of writing, the FTSE 100 and FTSE 250 collectively contain 69 shares with a forecast dividend yield of at least 5%.
Over time, I’m fairly sure I could build a portfolio that would provide a 5% income with the potential for further growth.
Although dividends are never guaranteed, by aiming to hold around 20 different stocks, I think I could limit the impact of any individual dividend cuts.
If I’m right, the sum I’d need to retire would fall sharply:
5% yield
Minimum
Moderate
Comfortable
Investment required
£288,000
£626,000
£862,000
Where I’d invest
Here’s an example of one dividend stock I already own that’s providing me with an attractive passive income. Retirement and insurance giant Legal & General Group‘s (LSE: LGEN) an example of a stock where investors are currently getting most of their returns upfront, in cash.
Although the group’s share price performance hasn’t been very exciting recently, the stock currently offers a chunky forecast dividend yield of 9.5%.
With more than £1trn of assets under management, Legal & General benefits from economies of scale. However, I can’t deny there’s some risk here – this is a huge and complex business, making it hard for investors to spot any looming problems.
My investment case is based on the view that Legal & General’s fast-growing pension buyout business will remain a strong cash generator, supporting attractive dividends.
The company certainly has a good record in this area. It’s paid a dividend every year for over 30 years, only cutting the payout once in the 2008/9 financial crisis.
I see it as a reliable high-yield income stock. I plan to hold the shares for the long term.
The post How much do I need to invest in shares to retire early and live on passive income? appeared first on The Motley Fool UK.
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Roland Head has positions in Legal & General Group Plc. 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.
