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By reinvesting dividend stock returns until retirement, investors can work toward a stable second income.
The regular payouts these stocks pay make them very attractive for compounding returns. Using a dividend reinvestment plan (DRIP), payments go back into the pool. Over time, these small contributions can lead to exponential growth!
Furthermore, with a stocks and shares ISA, UK residents You can invest up to £20,000 a year without paying any capital gains tax.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Choose the right actions
Ideally, I look for stocks with a long history of dividend growth. There are quite a few FTSE 100 actions that fit that criterion.
A couple of examples that come to mind are British American Tobacco and Diageo. Both are reliable components of my dividend income portfolio.
These stocks are known as dividend aristocrats by developing a reputation for steadily increasing dividends. Once they achieve such an honor, they hesitate to lose it, so they do everything they can to maintain their streak!
A dividend hero
I recently added the utilities group Severn Trento (LSE: SVT) to my retirement income portfolio. Barring two minor reductions, it has been increasing its dividend consistently for more than 20 years at an average rate of 3.8% annually.
As a group of public service colleagues National NetworkIts services are likely to continue to be in high demand. This puts it on the defensive against market declines, which is reflected in the fairly stable share price.
However, you have a LOT of debt, which is a risk. If you can't reduce this soon, you could default on payments and have financial problems.
The past year has been a struggle, with the share price falling 2%. But revenue, revenue and profit margin were up as of its last earnings call, so things are looking up. Additionally, it managed to increase its dividend, which is the key I'm looking for.
The yield now stands at a moderate but sustainable 4.5%.
Performance considerations
Buying the 10 highest-yielding dividend stocks seems like the obvious choice, right? Mistaken.
Performance alone doesn't tell me much about the reliability of the stock. Yields can change quickly and dividends may be cut or reduced at any time.
For example, with 4.8%, the City of London Investment Trust It has lower performance than many. However, it has 58 consecutive years of dividend growth under its belt. That's why I think it's a great addition to my dividend portfolio.
I also carefully select some reliable but high-yielding stocks, such as Legal and general. It is currently trading below its fair value, meaning the yield has risen to 8.7%, making it attractive.
Estimating returns
With a combination of yields between 4% and 10%, it is possible to achieve an average yield of 7%. Additional returns of 3% to 4% could also be estimated from price appreciation.
£10,000 invested in a portfolio at those averages could grow to around £183,500 in 30 years. It would pay out around £12,000 in dividends each year.
That's not bad. But adding an extra £100 each month could increase the figure. to £388,000. That would pay annual dividends of £25,000, more than £2,000 a month.
That would be a decent supplement to a pension.
