I reckon top notch FTSE 100 shares can help me build up a passive income stream through dividend-paying stocks. Here’s how!
My ground rules
Firstly, I’m conscious dividends are never guaranteed. They’re only paid at the discretion of the business if it can afford to do so. So if a firm has recorded a loss or can see trouble ahead – whether that’s internal, company-specific issues or external, macroeconomic issues – it may cut or cancel payouts.
Next, a higher dividend yield does not mean a better-quality dividend stock. It’s worth remembering that if a share price slumps, the yield is pushed up. On the surface of things it may appear more lucrative, but ask yourself, why is the share price falling? Is there trouble afoot?
Moving on, I want to buy stocks that can payout consistently. A few things I look at are a firm’s balance sheet, including debt levels. Is the dividend covered by earnings? Is the business set to grow or could technology or competitors render its products or services irrelevant in the future?
Finally, what’s the firm’s payout record like? Although past performance is not a guarantee of the future, I’d rather invest in stocks with a consistent record compared to a patchy one.
Some picks on my radar
Real estate investment trusts (REITs) are income-yielding property businesses. The beauty of REITs is that they must return 90% of profits to investors.
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One of my picks on the UK’s premier index is Land Securities Group. Size, profile, as well as a diverse range of property could help boost performance and payouts. A dividend yield of 5.8% is above the FTSE 100 average of 3.8%. However, it’s worth bearing in mind the property market is under pressure from rising interest rates as well as soaring inflation. Asset values are fluctuating and borrowing is costlier to pay down due to higher rates.
Next, tobacco stocks such as British American Tobacco and Imperial Brands are good dividend payers. They generate lots of cash and have a great track record of payouts. Their current yields of 9.8% and 7.7% are attractive. Ethical investors may not be tempted by such businesses. Plus, governments in developed countries are working hard to bring down smoking numbers. This could hurt the stocks and payout levels. However, smoking numbers in developing nations are rising massively, where these firms make most of their money, so this should keep the dividends flowing.
Finally, I think financial services stocks are a great way to boost passive income. Some options include Legal and General, M&G, and Aviva. These firms are at the mercy of economic headwinds mentioned earlier. However, they tend to have strong balance sheets, excellent records of performance and returns, and a loyal customer base with growth prospects to keep the money flowing to shareholders.
To conclude, there are plenty of great dividend stocks out there. These are just a few that caught my eye but I’ll keep investing in such stocks as and when I can to try and obtain a second income stream.
The post Here’s how quality FTSE 100 shares could provide me a second income! appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c., Imperial Brands Plc, Land Securities Group Plc, and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
