Here’s how you can aim to retire with £11,973 a year in passive income
It’s never too late to consider the stock market. And with regular investments, a decent passive income might be more achievable than it first appears.
Posted by James Beard
Published 25 January
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One way of supplementing the State Pension — currently (23 January) £230.25 a week for those who have a full record of national insurance contributions — is to have a generous passive income earned from dividend shares.
Understandably, some put off saving for their retirement until later in life. Even so, it’s still possible for a person in their 40s to build a decent second income. Here’s how they could aim to match the £11,973 a year paid by the government.
In the beginning…
Personally, I think a Stocks and Shares ISA’s an excellent investment vehicle. Its primary benefit is that income and capital gains can be earned free of tax.
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.
Current rules permit £20,000 to be invested each year. But a 40-year-old with no savings isn’t going to be able to afford this. Instead, I’d suggest a strategy of investing little and often.
For example, putting £300 a month into an ISA for 26 years (the state retirement age is currently 66) would grow to £256,512, assuming an annual return of 7%.
On retirement, some people prefer to buy dividend shares and live off the income rather than touch their capital. A portfolio of stocks yielding 4.7% would be sufficient to generate a retirement income of £11,973 from the £256,512 sitting in our example ISA.
Sometimes, a high yield can be a warning sign that investors are expecting a cut. Therefore, rather than focus exclusively on the biggest yielders, I think it’s a good idea to have a mix of stocks with the emphasis on identifying reliable dividend payers.
These are often found in ‘boring’ industries like the utilities sector, where reasonably-predictable earnings streams enable steady payouts to be made.
One example is National Grid (LSE:NG.). Or is it? Up until 2025, the electricity company had increased its dividend for 13 consecutive years. It then surprised investors by announcing a £7bn rights issue. This is a reminder that energy infrastructure is expensive.
Although the group spent more on its dividend than before the rights issue, that’s because there were more shares in circulation and the amount per share fell. This highlights the uncertainties surrounding shareholder returns. However, because of its track record and the industry in which it operates, I’m prepared to overlook this and believe it’s a bit of a blip.
Looking ahead
For the year ended 31 March 2025 (FY25), the group reported underlying earnings per share (EPS) of 73.3p. Through until FY29, it hopes to increase this by 6%-8% a year. As a result, the group aims to grow its dividend in line with inflation. At the moment, the stock’s yielding 4%.
This growth in earnings is underpinned by plans to spend £60bn on infrastructure, including £51bn on ‘green projects’, by FY29. Over the next five years, National Grid’s planning for 19GW of additional UK electricity capacity, with half coming from energy-thirsty data centres. The group’s FY25 return on equity of 9% shows that the potential returns on this investment are huge.
For these reasons, I think National Grid could be considered by those looking for a steady dividend share. But there could be some capital growth too. At the top end of its EPS forecast range, its forward (FY29) earnings multiple is an attractive 12.
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