Have £5k to invest? I think these FTSE 100 dividend stocks could pay you for life

Roland Head explains why he thinks the FTSE 100 (INDEXFTSE:UKX) could be the best way to build a second income stream.

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Wouldn’t it be great if you could make some smart investments today and then sit back and collect an income for the rest of your life? I have some good news for you. An investment like this may be possible.

Option 1: Buy the FTSE

No single company can guarantee to prosper forever. But I think it’s fair to expect that there will always be many large, successful companies. And a good number of these are likely to trade on the London Stock Exchange.

To earn an income from these companies without having to guess which they are, I think the safest solution is to buy a FTSE 100 tracker fund. These are cheap stock market funds which track the movement of the FTSE 100 index of the UK’s largest publicly-traded companies.

At the time of writing, the FTSE 100 offers a dividend yield of 4.5%. That’s fairly high by historic standards and looks attractive to me. Although I think dividend growth may be slow from this point, a FTSE 100 tracker could be a buy-and-forget income solution for the rest of your life.

Option 2: Try and beat the market

Some companies perform better than the market, some worse. And this year’s winners may be next year’s losers.

But there are some companies that have consistently outperformed the market for many years. In these cases, it’s sometimes possible to say that the businesses behind the stocks have a sustainable advantage over rivals.

Consumer giant

One example is FTSE 100 consumer goods giant Unilever (LSE: ULVR). A global portfolio of famous brands including Domestos, Hellman’s, Carte D’Or and Marmite help the group to generate double-digit profit margins and plenty of surplus cash.

Shareholders have reaped the rewards. The Unilever dividend has risen by nearly 50% over the last five years. That’s an average of about 8% per year. The shares have also performed well. They’ve gained about 75% over the last five years, compared to a rise of just 5% for the FTSE 100.

Unilever faces challenges from changing consumer tastes. The shares aren’t cheap either, priced at about 19 times 2019 forecast earnings, with a 3.5% dividend yield. But this business has survived and prospered for more than 100 years. I think this good progress is likely to continue.

The world’s favourite hotels

Another FTSE name with a long track record of beating the market is Intercontinental Hotels Group (LSE: IHG). You’ll probably know this firm better by some of its hotel brands, which include Intercontinental, Holiday Inn and Crowne Plaza.

The secret to this company’s market-beating performance is that it no longer owns many hotels. Instead, it applies its brands to hotels owned by other companies, through a mix of managed leases and franchise arrangements.

This approach enables IHG to earn a return on capital — a measure of profits — of nearly 40%. Minimal outlay is required each year, with the result that much of this cash is returned to shareholders, or used for growth-enhancing expansion.

Like Unilever, IHG shares have thrashed the market, climbing more than 50% in the last five years. This stock isn’t cheap, trading on 19 times forecast earnings, with a 2.1% yield. But I believe this is a business that should continue to prosper and outperform for many years. I’d be happy to buy these shares today and hold them forever.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended InterContinental Hotels Group. 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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