Most stock market investors place a lot of focus on capital gains. However, when investing for the long term, the power of dividends shouldn’t be underestimated. Not only do dividends tend to make up the bulk of returns from the stock market over the long run, but they also provide a fantastic source of passive income. Build up a large enough passive income stream from dividends, and there’s no reason you can’t quit your job and simply live off your dividend income.
With that in mind, today I’m looking at two FTSE 100 dividend stocks that both currently yield over 5%. If your goal is to quit your job and live off your dividends, these stocks could be worth a look.
Be greedy when others are fearful
This time last year, British American Tobacco (LSE: BATS) was the stock that everyone wanted to own. The shares had surged 60% in the space of three years and were changing hands for over 5,500p. However, sentiment can change pretty quickly in financial markets, and over the last year, the shares have fallen all the way down to around 3,700p, as investors have exited the sector in search of more exciting growth opportunities.
At the current share price, I believe BATS is worth a closer look, as the yield on the stock is now a high 5.2%, and is forecast to grow in the years ahead. Sure, there are risks associated with tobacco stocks. Smoking rates are declining in the Western World and government policies are impacting profitability. But it’s certainly not game-over for smoking just yet, and with a portfolio of Next Generation Products that could provide growth, and the key acquisition of Reynolds American completed, British American Tobacco looks well placed to keep delivering large cash dividends to investors, in my view. The shares currently trade on a forward P/E of just 12.7, which I believe offers good value.
Dividend hero
Another FTSE 100 stock that could be a good play if you’re looking to live off your dividends is electricity and gas transmission specialist National Grid (LSE: NG). This is another stock that’s fallen significantly over the last year, and as a result, now offers a high dividend yield.
National Grid has a solid dividend track record and has a policy to increase its payout in line with RPI inflation each year. Last year, the group paid shareholders 46p per share in dividends, which at the current share price, equates to a dividend yield of 5.5%. A forecast payout of 47p for FY2019, pushes the forward-looking yield even higher.
Like British American Tobacco shares, National Grid shares aren’t without risks. Jeremy Corbyn wants to renationalise the utility sector, while Ofgem has proposed ending the company’s current role as operator of the UK’s national electricity system. The company also has a quite a large amount of debt, which isn’t ideal with interest rates set to rise. But with a prospective yield of near 6% on offer, I believe the risk/reward profile here is attractive.
Of course, there are many other dividend stocks in the FTSE 100 that could help you build a passive income stream and quit your job. If you’re looking for more high-yield ideas, take a look at the report below.