The idea of working hard to choose a handful of FTSE 100 dividend shares and simply holding them for decades is attractive to me. Once the initial work has been done, the monitoring and maintenance of my portfolio would require modest time input.
I could choose to take the dividend payments as a personal income. Or I could reinvest them to keep my investment pot growing. But I’m still young enough to be in the accumulation stage of my investing career, so the reinvestment option appeals to me the most. By aiming to grow my portfolio, I’ll have bigger resources to provide me with an income in the future, perhaps when I retire.
I’d be selective about picking FTSE 100 dividend shares
However, successful dividend investing isn’t as easy as it at first might appear. There’s more to the strategy than simple hunting for the biggest dividend yields available in the FTSE 100. Sometimes, a big yield is a sign of trouble ahead in the underlying business. And that often means a dividend cut is on the way.
I think one of the trickiest categories is cyclical shares. Companies with cyclical operations often display big dividend yields and low earnings multiples just when their stocks are at there most dangerous. Often those big yields arrive when the cyclical business has been earning fat and growing profits for a long period.
However, the stock market – in all its collective wisdom – ‘knows’ there will be a downturn arriving at some point. So, the market tends to compress valuations. And that’s when we often see big yields and low valuations in cyclical stocks.
But those attractive metrics can be a trap! What often follows with cyclical stocks is a big plunge in earnings, a crashing share price and dividend-slashing festival. I’d look no further than the London-listed banking shares for evidence. Indeed, their performance over the past decade has been instructional.
I’d pick shares like these
And because I want to buy and hold my FTSE 100 dividend investments for decades, I’d put all cyclical stocks in the ‘too difficult’ pile and concentrate on dividend-paying shares with more defensive operations. So, it’s out the window with oil companies, banks, retailers, housebuilders, mining companies and the like. And I’d choose my stocks from sectors such as energy supply, utilities, fast-moving-consumer goods, healthcare and other defensive areas.
I’d aim to buy and hold shares such as Unilever and Reckitt Benckiser in the fast-moving consumer goods sector. And in healthcare, I’d go for AstraZeneca, GlaxoSmithKline and Smith & Nephew. I’d also consider ultra-defensive ‘sin’ stocks such as British American Tobacco, Imperial Brands and premium alcoholic drinks supplier Diageo. Then in utilities and energy, I’d choose National Grid, SSE and Severn Trent. And I also like stocks such as Smurfit Kappa, Bunzl, Sage and DS Smith, which all fit the defensive theme.
I’d put all those stocks on a watch list, follow the news they issue, and aim to buy shares in each one at opportune moments. For example, I’d be ready to pounce in the next stock market correction.