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There’s a huge hole in the UK’s public finances right now. As a result, there’s talk of removing the State Pension ‘triple lock’ to free up money for the government. Now, this is all just speculation at the moment, and the triple lock feature may not end any time soon.
But for those planning retirement, it could be a good time to look at dividend growth shares – which are capable of providing a rising income stream – just in case.
Retirees are at risk
The triple lock feature is designed to protect the purchasing power of retirees’ income. It ensures that the State Pension increases every year by whatever is highest out of inflation (CPI), wage growth, or 2.5%.
While it makes a lot of sense, the problem is that it costs the government a ton of money, especially now that inflation is higher than it was. And with the UK facing a £40bn-£60bn black hole in its finances, a lot of experts are saying it should be removed or changed.
Obviously, if it was removed, it would be a blow for those in retirement now and those approaching the end of their working life. Because with inflation remaining high, purchasing power’s continually being eroded.
Building a rising income stream
The good news is that there are plenty of other ways to generate rising income streams in retirement. Dividend growth shares are one.
These are shares that increase their dividend payments on a regular basis. Put together a portfolio of them, and an investor can potentially create a rising income stream capable of protecting against inflation.
Note that there’s potential for capital gains too. When companies increase their dividend payouts, their share prices often rise, leading to strong total returns (gains plus income) for investors.
A dividend growth stock to look at today
Now, there are lots of great dividend growth shares on the London Stock Exchange. One that I think is worth a look today is Diageo (LSE: DGE) – the owner of Johnnie Walker, Tanqueray, Guinness and many other well-known alcoholic beverage brands.
It’s out of favour with investors at present, which means the dividend yield’s higher right now than it has been historically.
Currently, the yield’s about 4.1%. That’s more than most UK savings accounts are paying.
Now Diageo has historically been a very reliable dividend increaser. However, last financial year (ended 30 June), it disappointingly held its payout flat at 103.48 cents per share.
Analysts expect the growth to resume this financial year however. This year and next, they expect the company to pay out 105 cents per share and 110 cents per share respectively.
As for why the stock’s out of favour today, it’s due to a few factors including a slowdown in growth, tariffs, leadership changes, and concerns that people are drinking less alcohol. Not only do younger generations seem to be drinking much less than older generations did, but new weight-loss drugs (GLP-1s) seem to be also impacting demand.
These factors obviously present risks for investors. But with the stock down 50% from its highs and offering a 4.1% yield, I think the risk/reward set-up looks quite favourable.
