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UK stocks remain my favourite way of building a long-term passive income, because they combine share price growth potential with generous dividends as well. I’m looking to build a big enough portfolio to effectively double what I get from the State Pension, by targeting a spread of dividend-paying FTSE 100 shares.
The full new State Pension is set to hit £12,548 a year from April 2026, after the planned 4.8% triple lock increase. So how much would an investor need in their Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) to double that income?
Building enough capital
One way to calculate that is to use the 4% safe withdrawal rate, which suggests if an investor draws that percentage of their pot each year, it should never run dry. Using that, generating £12,548 of annual income requires £313,700. It’s a big number, but it’s achievable, especially if people start early enough.
Let’s say somebody already has £30,000 in their ISA or SIPP. They then invest another £100 a month and everything grows at an average annual rate of 7%. After 30 years, they’d have £350,000.
They might not even need that much. Plenty of UK stocks currently yield 5%, 6%, 7% or more. With a 5% average yield, the capital needed to secure the same £12,548 income falls to around £250,960. At 6%, they need just £209,133.
BP shares have a juicy yield
Oil giant BP (LSE: BP.) has been in demand among dividend investors for decades, but the last 15 years have been bumpy, starting with the Deepwater Horizon disaster in 2010. Concerns over fossil fuels have intensififed, and the company’s shift towards renewables didn’t pan out. The pandemic crushed demand, then Russia’s invasion of Ukraine sent prices soaring before retreating.
Today, oil trades at around $62 a barrel, some way below recent peaks. BP can make a profit at roughly $40, and there’s a chance it might have to test that. The International Energy Agency recently cut its oil demand forecasts for both this year and next, citing slower growth in China, Brazil and India, and escalating trade tensions and tariffs. It’s also forecast a surge in supply, triggering talk of an oil glut.
Yet the BP share price has defied the gloom to rise around 20% over the past year, with most of that coming in recent months. Plus there’s income too from dividends, with a trailing yield of around 5.4%.
A handsome rate of dividend income
The company still generates solid profits, posting $2.21bn in Q3 against forecasts of $2.02bn. Management has continued share buybacks too, with another $750m planned in Q4. Energy stocks tend to be cyclical. I think BP is worth considering today, but with a long-term view, to allow events to swing back in its favour.
Relying on one company never makes sense. I prefer building a basket of 10 to 15 stocks across different industries to smooth volatility and keep income flowing. The FTSE 100 boasts plenty more firms with higher yields than BP, and many look less risky to me. Matching the State Pension is only a starting point. With time, discipline and diversification, investors can build far more substantial income stream for retirement.
