If I had £500, or any other amount, to start investing today, I’d buy FTSE 100 stocks. My first preference would be an FTSE 100 index tracker fund.
My second preference would be to buy a high dividend-yielding blue-chip stock that could provide me with some certainty in uncertain times.
High dividend-yielding FTSE 100 stock
There’s currently a whole range of high-yielding stocks in the FTSE 100. In my opinion, a large number of these should be avoided. A high dividend yield can often be a sign a company’s payout is unsustainable. A sudden dividend cut can produce large capital losses, which may wipe out years of income in a single day.
As such, my favourite high dividend-yielding FTSE 100 stock has to be Tesco (LSE: TSCO). This isn’t one of the most exciting businesses in the UK’s leading blue-chip index. Nevertheless, the group provides an essential service for UK consumers. No matter what the future holds for the UK and global economy, consumers will always need food and drink.
This has been exceptionally apparent over the past 12 months. Many companies have been forced to close their brick-and-mortar stores in the coronavirus pandemic. Tesco has been one of the few exceptions. The firm has been classed as an essential retailer. Unlike many, this means sales this year have increased.
Granted, the company does have some issues. The UK supermarket sector is highly competitive, and Tesco has struggled to stay ahead of the competition in recent years.
Still, I think the FTSE 100 group’s size is its main competitive advantage. Its countrywide distribution network, as well as the firm’s Clubcard offering, means it has an unrivalled distribution network and database of customer purchases. This allows management to tailor offers to consumers and streamline stock levels.
A long-term dividend champion
As long as Tesco can maintain these competitive advantages, I think the company will remain a FTSE 100 dividend champion. And there’s no reason why the business cannot stay ahead of the competition. It already has an enormous lead. Continued investment in the group’s operations will help maintain this advantage.
The mistake the business made in the past was to focus on profit over customers. It now seems to have corrected this error. Customer service is a priority for Tesco, and this clearly had a positive impact on the company’s bottom line. Profit margins have expanded rapidly since 2015, and this has helped facilitate dividend growth.
Therefore, I reckon as long as Tesco continues to do what it has been doing for the past five years, the group will remain a FTSE 100 dividend champion.
At current levels, the stock supports a dividend yield of 4.3%. That’s not the highest in the index but, in my opinion, Tesco’s sustainability it’s worth the trade-off. I’d rather have a 4.3% dividend yield for a decade than an 8% yield for a year.