Since most FTSE 100 stocks pay dividends today, I have plenty of choice when buying shares that meet my dividend criteria. Here I’m looking at the attributes I consider when investing for a passive income and a trio of stocks that fit the bill for me.
How to select income stocks
First of all, when choosing income stocks, I think the dividend yield, which is the dividend amount as a proportion of the share price, should be high. It is the return on my investment, so the higher it is, the bigger my gains.
Second, ideally the stock should offer capital growth too. Typically, high-growth stocks do not have high dividend yields. But it is reasonable to expect some capital growth over time. Even if the capital value declines long term, I should still be a net-gainer. This can happen if the dividend is high enough to make up for the loss in investment value.
And third, I see dividends as an additional source of medium-to-long-term income. This means I like stocks that have a history of paying dividends, and preferably have a high yield. This generates income for me for a long time.
Based on these requirements, here are three FTSE 100 stocks that I like best.
#1. Legal & General
Financial services group Legal & General has a plump dividend yield of 6.3%, making it among the most attractive FTSE 100 stocks from which to earn a passive income. Additionally, it continued to pay dividends despite the pandemic, which gives me some assurance of dividend stability.
The company’s stock price has also risen by 50% from last year, making it a double win for investors. Its decent financial health also encourages me to make a long-term investment in the stock.
#2. Rio Tinto
The multi-commodity miner Rio Tinto has had a strong year, as industrial metals’ prices rallied. As the global economy gets out of its funk later in the year, commodities should stay in demand.
This bodes well for both the miner’s share price and dividend yield, which is presently at 5.4%. This is not the highest of the lot, but considering a share price increase of 43% over the year and a positive outlook, I think it is a stock to buy.
#3. National Grid
The electricity and gas provider, National Grid is optimistic about its prospects. This should show up in its dividends too, which were increased by 1% yesterday. Its dividend yield is 5.2%, which is not too bad for a defensive stock. As a utility, there is a floor to its demand. This can translate into steady performance compared to cyclical stocks. Further, it means a higher likelihood of stable dividends as well.
A point to note
While there is a good chance that these stocks can continue to pay dividends, I like to bear in mind that all stock market investments are subject to risks. I do not have to look much beyond 2020 to realise that. Many FTSE 100 companies reduced or outright cancelled dividends as the pandemic hit.
But they have restarted dividends as well. This tells me, that as long as I invest in high-quality stocks that meet my investing criteria, I do reduce my risk levels.