The FTSE 100 offers an attractive average dividend yield today, which is something I wrote about recently. This is the case when I compare it to other countries’ stock market indexes, such as the US. So as an income investor, picking the best dividend stocks from the Footsie should allow me to make my money work hard. If yields broadly remain the same going forward, here’s where I’d look to invest to make dividend income.
Points to consider
If I want to set myself the goal of making £1,000 a year in dividend income, I can start to work backwards. I know that I’ll need to receive this income from a selection of the best dividend stocks available. But what factor is most important here?
I could look at the dividend yield. The higher the yield, the less of my own money I’ll need to invest in order to make £1,000 a year. For example, if I invested in stocks with an average yield of 5%, then I’d need to invest £20,000 to make the right amount of income.
If I went for a lower yield of 2.5%, then I’d need to invest £40,000 instead. So clearly the dividend yield is important, as I’ll likely have a finite amount of money ready to invest.
Another element I need to think about is diversification. It would be quite risky to invest everything in a single company that I believe to be the best dividend stock. This is because if anything happens and the dividend gets cut, my £1,000 a year is blown. Rather, if I invest in a selection of stocks from different sectors, I get a blended exposure. This also helps should one company cut a dividend, as it will have a more limited impact on my overall portfolio.
Some of the best dividend stocks right now
The part about diversification helps when I’m specifically looking at different sectors from which to pick the best dividend stocks. Traditionally, growth stocks reinvest most or all profits back into the business so don’t pay out dividends. More mature ‘value stocks’ are the ones that typically pay out income.
In particular, companies within financial services, utilities and healthcare are known for offering good passive income opportunities. For example, insurance companies Phoenix Group and Legal & General currently offer some of the highest dividend yields in the whole index. These are in excess of the 5% I modelled above, being 6.85% and 6.55% respectively.
When I look to utilities, again I can find some of the best dividend stocks in the index. SSE and National Grid both currently offer me yields in excess of 5%. Consumer demand for energy is unlikely to materially change in the future, so I’m confident that dividends will continue to be paid going forward.