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Forget the State Pension! I’m buying this 7.4% yield for a happy retirement

Tom Rodgers
Senior couple at the lake having a picnic

If you’ve ever looked grumpily through your finances and found the State Pension will offer nothing like a happy retirement, you’re not alone.

Work every day of your life? Not enough, say the bean-counters. At the end of it all, what do they offer you? £168.80 a week to live on, with the pitiful State Pension. If you’ve ever worked for yourself there may be a few missing National Insurance contributions the government will stiff you for as well.

Try this instead.

Get paid again and again

One of my best picks for a retirement-friendly stock is SSE (LSE:SSE). It pays a market-walloping 7.4% annual dividend, so you’ll take a tidy profit without any of the hassle of getting into risky small-cap long-shots.

Since you’re buying in a SIPP or Stocks and Shares ISA, reinvest your dividends to increase your holdings. This is the best way to beat the market and to make sure your future self gives you a pat on the back, not a kick in the goolies.

In 2018, SSE paid 94.7p a share in dividends, increasing at around 3% a year.

£10,000 invested in SSE stock will see you cream off nearly £530 in a year. Reinvest to take your holdings to £10,530-worth and you’ll not only compound your gains, but SSE will add another 3%, so your payout is more like £569. Let your dividends work for you while you sleep.

SSE has improved dividends per share every year since 2006 so there’s enough free cash flow in the business to keep rewarding long-term holders.

Energy boost

When you’re searching for your next investment to beat the State Pension it’s easy to get bogged down in balance sheets and EBITDA while overlooking how a company is run.

SSE selling its UK retail arm to Ovo was a bright idea, not least because it was at twice the price expected by City analysts. Household energy markets are producing ever slimmer profits and it’s a race to the bottom. Now SSE can use its engineering knowhow to instead build and run renewable energy infrastructure.

In October, subsidiary SSE Renewables picked a new base of operations for the £6bn 120-turbine Seagreen Offshore Wind Farm, which will produce enough energy to power 40% of all the homes in Scotland. The UK is the biggest offshore wind market and this will be the UK’s most powerful wind farm.

It speaks volumes about how management is looking ahead to see where the best profits will be and getting them locked in for investors.

More good decisions

SSE was willing to walk away from a 2018 merger with fellow Big Six energy provider Npower. The latter’s German owner Innogy later had to ‘restructure’ (read: sack a lot of people) with the struggling operator now due to be swallowed up by Eon. Innogy notably referred to its loss-making UK arm as “an open wound that is bleeding profusely“. Lovely. I’m rather happy SSE didn’t get into bed with that.

Warren Buffett once said of himself and investing partner Charlie Munger: “Not many businesses meet our criteria.”

I can’t see many FTSE 100 7%+ yielding shares where bosses also have good investment plans, foresight to build profit, and a solid dividend history. There are a couple though, and I’m loading up on them for my retirement.

More reading

Tom has no position in 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.

Motley Fool UK 2019