UK Markets open in 2 hrs 17 mins

Retirement savings: why FTSE 250 dividend stocks can help you beat the State Pension

Peter Stephens
Senior Couple Walking With Pet Bulldog In Countryside

Building a retirement nest egg is likely to become increasingly important in the coming years. The State Pension age is set to increase to 67 over the next decade, while its current annual payout of £8,767 is unlikely to provide a comfortable retirement for most people.

With the FTSE 250 having experienced modest growth in recent years, there appear to be a number of buying opportunities available for long-term investors. Alongside the high yields on offer within the index, this could help you to build a retirement portfolio that reduces your reliance on the State Pension.

Here’s why now could be a good time to start buying mid-cap shares, and how they could boost your long-term financial prospects.

Low valuations

With the FTSE 250 more reliant on the UK economy’s performance than the internationally-focused FTSE 100 index, Brexit appears to have held back the performance of mid-cap shares in recent years.

Although the UK economy has continued to grow and employment is at a high level, investors are maintaining a cautious stance towards companies that rely on the UK economy. As such, a number of high-quality businesses in the FTSE 250 index currently have low valuations despite being forecast to generate improving profitability in the coming years.

Low valuations could signal a buying opportunity for long-term investors. The track record of the FTSE 250 shows it has always recovered from downturns and difficulties in the past, which suggests that it will ultimately overcome the risks posed by Brexit to reach new record highs. Therefore, buying at a time where it offers good value for money could lead to a surprisingly large retirement nest egg in the long run.

Dividend prospects

While the FTSE 250 currently has a dividend yield of 3%, many of its members have significantly higher income returns. In fact, around 25% of the index’s constituents have yields that are above 5%. This means it’s possible for an investor to build a diverse portfolio of income stocks, while obtaining a generous yield.

With the index’s past total returns being substantially made up of dividends and their subsequent reinvestment, focusing your capital on income shares could be a sound idea. It could provide a strong rate of growth prior to retirement, as well as scope for a rising income in retirement.

State Pension prospects

With the State Pension age rising and there being the prospect of it delivering a slower rate of growth in the long term as its affordability comes under pressure, investing in FTSE 250 shares today could be a shrewd move.

With the cost of sharedealing having fallen and it being straightforward in most cases to open a Stocks and Shares ISA, the opportunity to reduce your reliance on the State Pension has arguably never been more appealing.

The post Retirement savings: why FTSE 250 dividend stocks can help you beat the State Pension appeared first on The Motley Fool UK.

More reading

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 2020