If I had no savings at 40 – or any other age – I’d set the ball rolling by purchasing a couple of great value FTSE 100 dividend shares.
The blue-chip index is packed with them right now. Many are cheap and offer super-high yields. Typically, dividend stocks are never going to shoot the lights out. Instead, they offer a combination of long-term income and growth, which compounds over the years.
I’d buy them in a Stocks and Shares ISA, as this allows me to take all my dividend income and share price growth free of tax for life.
Hunting for income
If I didn’t hold any dividend shares, I’d probably start with FTSE 100 insurer Aviva (LSE: AV). It’s a solid, diversified financial services business that offers a spread of insurance, wealth management and retirement products with 18m customers.
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As people wake up to the fact that the State Pension won’t provide a comfortable retirement, more are saving under their own steam. Companies like Aviva will benefit.
It’s a solid, old-school business whose share price has gone sideways for some time. However, its shares have risen 19.9% in a year, against growth of just 2.19% across the FTSE 100 as a whole.
My worry is that CEO Amanda Blanc may struggle to drive growth. She has done a good job of streamlining its sprawling operation, but building market share and boosting profits is never easy in a mature market. I’d rather have bought it before the recent share price hop rather than afterwards, as there is a risk it could retreat.
Until recently, Aviva was dirt cheap trading at around seven times earnings. It’s pricier today at 13.14 times, but not expensive. The trailing yield is still attractive at 6.81% a year, which smashes any savings account. Dividends are never guaranteed and cover is thin at 1.1 times earnings. I’d still buy it, with aim of holding for years and reinvesting every dividend to generate growth.
Another great high yielder
For diversification purposes, I’d pluck my next FTSE 100 dividend stock from a different sector and buy multinational electricity and gas utility company National Grid (LSE: NG). This is arguably one of the most solid dividend income stocks of all, as shareholder payouts are funded from government-regulated earnings.
Currently, the stock yields 5.37% a year. That is lower than Aviva but still beats best buy cash accounts and with luck should rise slowly but steadily over time.
National Grid is a little bit more expensive than Aviva, trading at 16.85 times earnings. Investors are willing to pay a premium price for the security it offers. Having said that, the National Grid share price has fallen 8% in the last year. That’s quite a rarity, and I would see this as an opportunity to buy it at a reduced price.
Even a relatively safe stock carries risks. National Grid has to invest billions in energy infrastructure, and costs can easily overrun. It had net debt of £46.2bn, and it’s forecast to rise slightly in 2025. If the shares fall, the capital losses could wipe out dividend income gains.
I’d combine National Grid with Aviva, then go hunting for more high-yielding dividend shares to spread my risk and mop up the rest of my ISA allowance. There are plenty more out there.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
