How much do you need in UK shares to target a £2,000 monthly passive income in retirement?
UK shares have long been my favourite way to building a dependable retirement income, because they pay some of the most generous dividends in the world. Iâm not chasing quickfire growth potential here, I can get that elsewhere on the FTSE 100. What I’m after is a steady flow of cash that can help cover the bills once I decide it’s time to stop working.
A £2,000 monthly income purely from investing adds up to £24,000 a year. That may sound ambitious, but it isnât fantasy land. Ideally, investors should aim for a good degree more than that, if they can.
A retirement income rule of thumb says drawing 4% of a portfolio of equities each year will preserve the underlying capital. Using that, targeting £24k a year would require £600,000. However, a diversified portfolio of FTSE 100 dividend stocks yielding 5% on average would generate the same income from £480,000.
FTSE 100 shares build wealth
Dividends work best when left alone, thanks to the miracle of long-term compounding. Reinvesting income buys more shares, which generate more dividends, in a snowball effect that constantly gathers pace. Adding fresh money regularly can accelerate the process, especially early on as this has longer to snowball too.
I spread my savings between a Stocks and Shares ISA and a Self-invested Personal Pension (SIPP). ISAs offer tax-free income later, while SIPPs give valuable tax relief on the way in. Used together, they form a solid base for retirement planning.
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.
British American Tobacco thrives
One stock that fits neatly into this approach is British American Tobacco (LSE: BATS). It has increased its dividend every year since the turn of the millennium, which is a brilliant achievement. This doesn’t just give investors a high income, but one that steadily rises too.
Today, the trailing yield’s a healthy 5.6%. Also, the British American Tobacco share price has risen an impressive 46% over the last year, boosting investors’ underlying capital. Despite that run, the valuation still looks reasonable, with a price-to-earnings ratio of 11.6.
Of course, smoking is coming under constant regulator pressure, as are spin-offs such as vaping, while cigarette makers are also being squeezed by black market operators.
On 9 December, the board disappointed investors by saying that overall revenue growth over the next year is likely to come in at the lower end of its expectations. Traditional cigarette volumes continue to slide, while sales of smokeless products and vapes accelerate. However, British American Tobacco still plans to return £1.3bn to shareholders next year via share buybacks.
Time and diversification
No single share can fund a reliable retirement income on its own. Diversification matters just as much as yield. I prefer to hold around 15 income-focused stocks across different industries, mixing reliability with modest growth. Investors might consider buying British American Tobacco as part of that blend, but some will shy away from such a controversial sector. No problem. There are plenty more high-yielding stocks on the FTSE 100.
Building a £2,000 monthly income takes patience rather than clever tricks and short cuts. The real magic lies in staying invested, reinvesting dividends, and giving UK shares time to turn steady contributions into lasting financial freedom.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
