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As I plan for retirement, the idea of a stable and lucrative second income becomes increasingly important. I enjoy the finer things in life, so to enjoy a comfortable retirement I need more than just a basic pension plan.
One way to try to achieve this is by investing in FTSE 100 Dividend shares in a stocks and Shares ISA. These stocks have the potential for both capital appreciation and a steady stream of income through dividends. Additionally, the benefits provided by an ISA allow British residents to invest up to £20,000 a year without 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.
Key Dividend Metrics
When I choose stocks for my income portfolio, I typically look at the payout-yield ratio.
Yield is a percentage paid per share. For example, if a share pays a dividend of £1 and its price is £20, the dividend yield is 5%. Higher yields may indicate attractive income opportunities, but may also suggest underlying risks for companies if yields are exceptionally high compared to peers.
The payout ratio measures the proportion of earnings paid out as dividends. A payout ratio below 60% is often considered sustainable, indicating that a company retains enough earnings to grow while providing returns to shareholders. Conversely, a very high payout ratio could mean that a company is trying too hard to maintain dividend payments, which can be a red flag to investors.
Another thing to check is the ex-dividend date, especially if the company only pays dividends once a year. This is the deadline set by the company, after which new buyers of shares will not receive the next dividend. To qualify for the dividend, an investor must purchase the shares before this date.
An action to consider
One stock that I think would be a great addition to a second income portfolio is British land group (LSE: BLND). This real estate investment trust (REIT) focuses primarily on commercial properties, but has a diverse portfolio of offices, retail spaces, and residential developments.
However, the real estate market is very sensitive to economic crises, which is a risk to consider. If a pandemic-like issue occurs again, the stock price could tank. You also run the risk of losing some of your market share to competitors such as Taylor Wimpey and Vistry Groupwhich could threaten your profits.
Despite a 40% price rise last year, the company reported a £1m loss this year. However, earnings are expected to grow 28% annually going forward and debt is well covered. I hope it becomes profitable again soon.
It has been paying dividends for almost 30 years, going from 9p per share in 2000 to 31p in 2019. However, dividends were reduced in 2020 and now stand at 22.8p per share. The yield is relatively high at 5.3%. That would pay more than £1,000 in dividends a year on a £20,000 investment. If you contributed £5,000 a year to the ISA and reinvested dividends over 20 years, you would pay out more than £21,000 a year. A decent second income.
Overall, it seems like a reliable payer that increases during strong economic periods. As such, I plan to buy the shares when I release some capital next month.
