Dividend stocks form a core part of my portfolio, offering passive income with minimal effort on my part. But it’s good to be sceptical of companies offering big dividend yields as sometimes they’re not sustainable. But that’s why it pays to do research. For me, the FTSE 100 is one of the safest places to look for these passive income shares.
2022 is forecast to be the second best year on record for dividend payouts according to broker AJ Bell. FTSE 100 dividends are set to deliver £114bn in returns to shareholders, including £32.7bn in share buybacks already announced. AJ Bell expects £81.2bn to be paid out in dividends by the end of the year, with the FTSE 100’s net profits tipped to hit a record high of £169.7bn.
Rio Tinto is set to be the index’s single biggest dividend payer, paying out £7.4bn. Meanwhile, Persimmon should be the highest-yielding stock at 11.2%.
Data released by the brokerage in December suggested the FTSE 100’s aggregated dividend yield would be around 4.1% in 2022.
My strategy
The size of my portfolio partially dictates the size of the smallest investment I make, especially as my platform charges fees per transaction — I use the Hargreaves Lansdown platform. As a result of the fees and the relative size of my portfolio, with £5,000, I wouldn’t split it more than three ways.
My picks
I see NatWest as a good place to start. If I were to buy today, I could expect a dividend yield of 4.8%. Likewise, the dividend coverage ratio is healthy. In 2021, the coverage ratio was just over 2 times, suggesting the payments are sustainable. Furthermore, the bank could fare well in the short term as higher interest rates increase margins.
It’s worth noting that a downturn in the economy could impact the bank’s operations too. But on the whole, I’m confident on this one. In fact, I recently added it to my portfolio and will be receiving a dividend payment in May. A £2,000 investment today could generate £96 of dividend over the course of the year.
Housebuilders are also a great place to look for strong dividend yields. I actually hold a few housebuilders for the passive income. One stock which I don’t own and I’m considering is Persimmon. If I buy today, I can expect a dividend yield of 10.8%. There are certainly issues facing the housing sector, including interest rate rises that may impact demand for homes. As a result, Persimmon, and many other homebuilders are trading at a discount versus this time last year. This comes despite a stellar year for the sector. However, I’m confident on strong long-term demand for houses in UK.
Finally, Imperial Brands is a controversial one as many people don’t like investing in tobacco, but it’s something I’m considering buying. If I buy now, I can expect a dividend yield of 8.3%. That’s substantially above inflation. The stock looks pretty cheap too with a price-to-earnings ratio of 6.8. However, tobacco firms could be hugely impacted by regulatory changes and policy decisions, so there’s plenty of risk here. I’ll continue to think about that one.