Living off the State Pension in retirement is unlikely to provide financial freedom for most people. As such, investing in FTSE 100 shares to build a retirement nest egg could be a good idea.
The index offers international exposure to provide greater diversity during an uncertain period for the UK economy. It also has a number of companies that trade on low valuations, and that offer income appeal.
Therefore, now could be the right time to invest in large-cap shares to improve your retirement prospects.
With the UK currently facing a relatively high level of political and economic uncertainty that may continue through 2020, holding a diverse range of international companies could be a shrewd move. It may reduce overall risk, as well as provide exposure to economies across the emerging world that are likely to grow at a faster pace than developed economies such as the UK.
With around two-thirds of the FTSE 100’s income being generated outside of the UK, it is essentially an index of global businesses. They could provide a favourable risk/reward ratio at the present time, as well as over a long time horizon.
The FTSE 100 may not have a reputation for being a growth index. After all, larger companies have historically found it more difficult to post rapid earnings growth compared to their smaller peers.
However, the index’s track record suggests that its capital growth credentials may be stronger than many investors realise. For example, since its inception 36 years ago, the index has returned an annualised growth rate of around 6%. This suggests that while its price level is only slightly higher than it was 20 years ago, over the long run it could produce surprisingly high capital growth to complement its income returns.
As such, buying a range of undervalued large-cap shares could be a sound idea. They may be able to offer upward re-rating potential, as well as earnings growth, in the coming years.
With the FTSE 100 currently having a dividend yield of around 4.5%, it has a higher income return than its long-term average. Not only does this suggest that it offers good value for money, it may also mean that its income prospects are relatively bright. That’s especially the case when its income return is compared to that of other assets such as bonds and cash.
Therefore, investors who are aiming to generate an income from their portfolio may wish to buy FTSE 100 shares. They could provide a resilient and inflation-beating dividend outlook when purchased as part of a diverse portfolio of shares. And with dividend reinvestment accounting for a large proportion of the index’s total returns in the past, dividend shares may also be of interest to those individuals who are seeking to build a retirement nest egg to beat the State Pension.
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Peter Stephens has no position in any of 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