Why I think FTSE 100 dividend shares yielding 5%+ could help you to beat the State Pension
At the present time, there are 27 shares in the FTSE 100 which offer dividend yields in excess of 5%. This is not a huge surprise, since the index itself has a dividend yield of around 4.7% after it’s fallen in value by around 1,000 points since reaching an all-time high last May.
Of course, just because a stock has a dividend yield of over 5% doesn’t necessarily mean it offers investment appeal over the long term. With risks facing the world economy being high, there could be challenges ahead for a variety of sectors. But at a time when the State Pension age is expected to rise and it already offers a relatively low level of income per year, FTSE 100 dividend stocks could offer the chance to generate a higher income in retirement.
Low valuations
As mentioned, one reason for there being such a large number of FTSE 100 stocks offering high yields is the decline in the index in recent months. After experiencing a decade-long bull market, investors now seem to be cautious about the prospects for future growth. Risks, such as rising US interest rates, Brexit, and poor US-China relations, may continue to weigh on the financial prospects for a variety of stocks, and could mean there are further losses ahead in the near term.
Financial strength
However, many of the 27 FTSE 100 stocks yielding over 5% offer strong balance sheets, as well as bright financial futures. Certainly, investor sentiment could come under pressure during the remainder of 2019 as a result of potential threats facing the world economy. But from a fundamental perspective, there appear to be a number of stocks which have low debt levels, improving cash flow, sound growth strategies, and track records of performing well over a sustained time period. As such, buying them today may lead to a growing dividend, as well as scope for capital growth over the coming years.
State Pension
For many individuals, the State Pension will prove to be inadequate for their spending needs in retirement. While many people will see their housing costs fall in older age, versus previous years, the reality is that the State Pension amounts to just £164 per week. This means that a supplementary income is likely to be required, and FTSE 100 dividend shares could be a sound means of achieving that at a time when bond prices are relatively unattractive and tax changes are making buy-to-let investing less appealing.
As with any investment, diversification is a sound means of reducing company-specific risk when it comes to buying shares. Since there are a large number of companies offering high yields at the present time, obtaining a range of stocks in a variety of industries should be quite straightforward. Doing so could help you to overcome a relatively low State Pension and enjoy an improved financial outlook in retirement.
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Peter Stephens has no position in any of the shares mentioned. 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.
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