Build a second income stream with these FTSE 100 dividend stocks

FTSE 100 (INDEXFTSE: UKX) dividend stocks are the best way to build a second income. Here are two of the best companies to buy.

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The FTSE 100 is the UK’s leading stock index, but it is also one of the best dividend indexes in the world. 

According to the Financial Times, the FTSE 100 current yields 3.8%, the second highest dividend yield in the FTSE Global Equity Index Series. The only index to offer a higher distribution is the FTSE Emerging Europe index, which supports a yield of 4.9%. 

So, if you’re looking to build a second income stream, the FTSE 100 is one of the best places in the world to start. 

Dividend champion

The FTSE 100’s average dividend yield is so big because the index is made up of high-yield heroes, such as Direct Line (LSE: DLG). 

As one of the largest and most recognisable insurance brands in the UK, I believe Direct Line would make a great addition to any investors portfolio.

The insurance business is, by nature, highly cash generative and profitable if companies are run effectively, although if businesses are mismanaged, the losses can be devastating. Direct Line is a well-managed business as evidenced by its return on equity — a measure of how much profit the company earns in comparison to the total amount of shareholder equity on the balance sheet — of 15.2% for 2017. This ratio puts the enterprise in the top 25% of the most efficient public businesses in the UK. Further, these high returns mean that the business is throwing off plenty of cash.

Management has decided to return the bulk of this cash to investors. The City is expecting Direct Line to distribute 28p per share as a dividend in 2018, equivalent to a dividend yield of 8.3% of current prices. A similar amount is expected in 2019. 

I’m excited by these dividend credentials. You can get your hands on this income today for just 11 times forward earnings. 

If you are looking to build a second income stream with FTSE 100 stocks, Direct Line is indeed worth further research.

Piggy bank 

Another FTSE 100 income play that could help you generate a second income is Marks & Spencer (LSE: MKS). Marks might be struggling when it comes to competing with online retailers, but the company’s cash generation is what makes me believe that this is a top dividend stock.  

For the year ended 31 March, the group generated £582m of free cash flow before adjusting items. Total cash generated from operations during the period was £850m, easily covering the dividend requirement of £303m. 

These numbers indicate to me that even if Marks continues to struggle to regain its position at the top of the UK retail industry, it will remain an income champion for investors. There’s plenty of cash to both invest in operations and pay shareholders. 

At the current rate, the dividend of 18.7p per share gives a dividend yield of 6%, and as mentioned above, is covered nearly twice by free cash flow from operations. On top of this market-beating dividend yield, the shares also look attractive on a valuation basis, trading at 11.7 times forward earnings. 

These numbers are enough to convince me that Marks is a decent income play for any portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

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