FTSE 100 dividends play a key role in my share portfolio. Although no dividend is ever completely safe, in normal times these big-cap stocks often provide good visibility on future payouts.
If I was building a new portfolio today, I’d certainly include a decent chunk of FTSE 100 exposure. In this piece, I’ll explain how I’d invest £5,000 in the lead index today and what I might buy.
Keep it simple
I’m a great believer in keeping my investments fairly simple. As a rule of thumb, I’d say that if I can’t explain it easily, I probably don’t understand it well enough to invest.
The simplest way to invest in FTSE 100 dividends would be to put my £5k into an index tracker fund, or ETF.
These low-cost funds track the stocks in the FTSE 100 and would let me choose whether to receive the dividends or have them reinvested automatically.
The FTSE 100 is expected to provide a dividend yield of around 4.1% in 2022, according to research published in December by broker AJ Bell. I think that’s quite an attractive income in today’s low-interest-rate world.
If I didn’t have the time to research individual dividends in detail, I’d invest my cash in an index tracker fund today. I’d be quite comfortable with this approach.
I can do better than 4%
However, as a keen share investor, I spend quite a lot of time analysing stocks. I think I should be able to do better than 4% in 2022. If I was investing £5,000 in FTSE 100 dividends today, I’d probably choose five individual shares and invest £1k in each.
Restricting myself to five shares would help to keep my trading costs under control. Although I don’t think five shares is enough to build a diversified portfolio, I’d use this as a starting point to add more in the future, when I could afford to.
I’d make diversification a priority, because any dividend cuts from my shares would have a big impact on my income. To help manage my risk, I’d also aim to invest in a mix of sectors, including some defensive areas.
FTSE 100 dividends: where I’d start
One defensive stock that would be high up on my list is consumer goods group Unilever. This FTSE 100 stalwart is out of favour with investors at the moment, as growth has slowed.
I can see some challenges for this group. But I think Unilever’s brand portfolio and global reach will enable the group to get back on track sooner or later. In the meantime, the shares look decent value to me, with a 4.1% dividend yield and a forecast price/earnings ratio of 17.
Another stock I’d consider would be savings and investment group Legal & General. Like Unilever, L&G has a big share of the market, attractive profit margins and generates plenty of cash. Legal & General’s forecast yield of 6.9% looks tempting to me, as the payout hasn’t been cut since the 2008 financial crisis.
Looking elsewhere, I’d keep my focus on companies with strong track records and attractive dividend yields. I think it should be possible to target an average yield of 5%, giving me a useful gain over the FTSE 100 index average yield of 4%.