With the average savings account paying around 0.06%, it’s incredible to think that loads of top FTSE 100 dividend stocks generate income of 5%, 6%, or even 7% a year.
FTSE 100 dividend stocks are a fantastic source of income, which can be reinvested back into a portfolio to turbocharge returns, or used to supplement a pension after retirement.
The pandemic has been tough on dividends, as many FTSE 100 companies scrapped or suspended theirs during the first lockdown. Some, notably the banks, were ordered to do so by the authorities. However, many have now restored their payouts, and more will follow.
I’d check out these high income heroes
This year, FTSE 100 dividend stocks could yield as much as 3.5%, according to online platform AJ Bell. Many yield far more. No investor should judge a company purely by the size of its dividend, but there are some impressive shareholder payouts right now.
Two FTSE 100 companies offer dividend yields of more than 7%: British American Tobacco yields 7.81% and asset manager M&G pays 7.53%. There are pros and cons to investing in these two companies, but I have recently explained why I’d buy M&G. I think both offer a terrific level of income in a low-interest rate world.
I am also a fan of insurer Aviva, which yields 6.55%, and another insurer called Phoenix Group Holdings. It earns a steady living from managing ‘closed’ pension and insurance funds, and yields 6.51% a year.
Another insurer, FTSE 100 dividend stock Legal & General Group, also yields more than 6%, as does oil giant BP and mobile phone specialist Vodafone Group. As with any dividends, the income isn’t guaranteed. Companies have to keep generating profits to pay them. I examine their prospects carefully before investing. I favour companies with strong balance sheets, reliable earnings, loyal customers, and a defensive ‘moat’ against competitors.
I’d also consider these FTSE 100 dividend stocks
My aim is to build a balanced portfolio of around a dozen FTSE 100 dividend income stocks. That way if one or two struggle, others will hopefully compensate. I would also spread my money across different sectors, say, banking, oil, healthcare, utilities, mining, technology, and telecoms.
So I might include a pharmaceutical company such as GlaxoSmithKline (which yields 5.97%), a global mining giant like Rio Tinto (5.39%), and a utility such as National Grid (5.32%).
I would never buy any FTSE 100 dividend stock unless I planned to hold it for a minimum of five years. Ideally, I would aim to hold for much, much longer. This would allow me to overcome the short-term volatility that goes with investing in shares. Judging by the shares named here, achieving income of 5% a year shouldn’t be too hard. Better still, it may rise in future, as companies look to increase their dividends over time.