Cash ISAs have become pretty hopeless for anyone needing an income from their savings and investments. The best one-year rate I can find at the time of writing is just 1.2%. For a long-term income, I think it makes more sense to buy FTSE 100 dividend stocks.
For this piece, I’ve selected three stocks with an average forecast yield of 7.1%. All three payouts should be backed by cash flow — I think they look safe for the foreseeable future.
A sinful 8% payout
Health-conscious investors should look away now. Dividends at British American Tobacco (LSE: BATS) depend on cigarette brands such as Dunhill, Rothmans and Lucky Strike.
Sales have suffered slightly due to lockdown restrictions in some markets, but the company still expects revenue growth of between 1% and 3% this year.
Not all investors are comfortable with tobacco stocks. But the financial reality is that BATS enjoys stable profits, high profit margins and strong cash generation. Net debt is gradually falling after a series of acquisitions and chief executive Jack Bowles seems confident that dividend growth can be maintained.
Although I’d like to see BATS’ debt a little lower, I agree with Mr Bowles. Last year’s 203p per share payout was comfortably covered by free cash flow.
Analysts expect the dividend to rise by 7% to 217p per share this year, giving a forecast yield of 8.1%. I think this FTSE 100 dividend stock remains a top pick for income.
This dividend stalwart looks like a buy to me
My next pick is telecoms giant Vodafone Group (LSE: VOD). Best known as a mobile operator in the UK, it’s also one of the biggest broadband network operators in mainland Europe and a top mobile operator in Africa.
The group’s operations are being fine-tuned and focused by chief executive Nick Read, who was previously Vodafone’s finance boss. He knows exactly how all the nuts and bolts go together. I believe he’s doing a good job restoring the firm’s reputation as a top FTSE 100 dividend stock.
Although the UK government’s decision to ban Huawei kit from UK networks is a blow, Vodafone has until 2027 to remove all of the Chinese firm’s kit from its 5G network. Equipment used on older networks will be allowed to stay in place.
I suspect the cost of these changes will be absorbed without too much difficulty. I certainly don’t think it will pose a threat to Vodafone’s 6.3% dividend yield, which was comfortably covered by surplus cash last year.
Don’t overlook this FTSE 100 dividend stock
You might not have heard of FTSE 100 life insurer Phoenix Group (LON: PHNX). This is because the firm’s activities are mostly concerned with managing closed books of older policies, which it buys from other insurance companies.
Phoenix is a specialised and efficient business that generates a lot of surplus cash. Although dividend growth has only averaged about 2% in recent years, that’s enough to match inflation. And with the shares offering a yield of 7%, shareholders receive a decent cash return on their investment each year.
The only downside of this business is that it’s difficult to understand. We really don’t have much choice but to trust the firm’s calculations about future profits and cash flow. However, I’ve been following this stock for some time and believe Phoenix has a good track record of delivering on its promises.