The State Pension’s been in the news lately, with Prime Minister Andy Burnham announcing plans to end the Triple Lock by breaking the link with average earnings when calculating its annual increase.
Instead, it’ll rise by the higher of inflation or 2.5% each year and, in the words of Burnham, “will hold its value relative to earnings over time”. A sort of adjusted Triple Lock, if you like.
More, please!
Experts agree that £13,036.40 a year won’t provide for a comfortable retirement. That’s why millions of people own stocks and shares. However, there’s no magic wand. In my opinion, the best approach is to invest as much as you can afford for as long as possible.
Of course, the end result depends on the growth rate achieved. The table below shows how a portfolio of shares could grow over 30 years, depending on the amount invested each month and the annual return.
| Monthly investment/annual return | 5% | 6% | 7% | 8% |
|---|---|---|---|---|
| £100 | £81,869 | £97,925 | £117,606 | £141,761 |
| £200 | £163,739 | £195,851 | £235,212 | £283,522 |
| £300 | £245,609 | £293,776 | £352,819 | £425,283 |
| £400 | £327,479 | £391,702 | £470,425 | £567,045 |
| £500 | £409,348 | £489,628 | £588,032 | £708,806 |
Once retirement age is reached, the portfolio could be rebalanced towards income shares. But how much is needed to equal the State Pension? Again, it depends. This time, we need to consider the yield.
For example, a collection of shares returning 5% a year would need to be valued at £260,720 to produce £13,036 a year:
- 5%: £260,720
- 6%: £217,267
- 7%: £186,229
- 8%: £162,950
- 9%: £144,844
- 10%: £130,360
Is this realistic? I think so. There are 63 stocks on the FTSE 350 that are currently (10 October) yielding 5%+.
One of these is Supermarket Income REIT (LSE:SUPR) which, based on the past four quarters, is currently paying 7.6%. It owns a £2bn collection of 131 large grocery stores in the UK and France.
As a real estate investment trust (REIT), it must pay an annual dividend equal to at least 90% of its rental profit, if it wants to retain certain tax privileges. A figure of less than half of earnings is more typical for other types of stocks.
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.
Of course, experienced investors know that dividends cannot be guaranteed. Indeed, threats to the REIT’s payout include rising interest rates that could make future borrowing more expensive.
A sign that it’s close to its self-imposed loan-to-value ceiling came in July, when the group asked shareholders for another £100m to pay for six new stores. Also, the commercial property market can be cyclical.
Even so, the group has an excellent track record. It’s increased its annual payout every year since listing.
And from an operational perspective, it has 100% occupancy and no bad debts, an indication of the quality of its tenants, which includes Tesco, J Sainsbury, and Carrefour. Also, with a weighted average unexpired lease term of 11 years, it has good visibility of future revenue.
In addition, it claims to have the second-lowest costs relative to income among the FTSE 350’s REITs.
Final thoughts
It’s for these reasons that I own the share. It forms part of my long-term strategy of trying to supplement the State Pension with an additional income stream, with the ultimate aim of providing me with a better standard of living in my ‘golden years’. I think others could consider the stock too.
But Supermarket Income REIT’s just one exciting dividend share that’s caught my attention recently.
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James Beard owns shares in Supermarket Income REIT.
