With interest rates at record lows, it’s currently challenging to earn a decent return on savings. To overcome this problem, I’d buy a basket of FTSE 100 dividend stocks.
Buying a selection of these shares could produce an attractive income stream for any portfolio, with the potential for capital growth over the long run as well.
FTSE 100 income stocks
One of the best sectors to look for income in the FTSE 100 right now is, in my view, the homebuilding sector.
Homebuilders, such as Persimmon (LSE: PSN), were among the first sectors to start operating again after the March shutdown. Since then, the industry has been buoyed by surging demand for properties. The government’s stamp duty holiday on homes under £500,000, as well as record low interest rates, have encouraged buyers.
Coupled with the help-to-buy scheme, these tailwinds have been a boon for Persimmon and its peers, such as Taylor Wimpey (LSE: TW) and Berkeley (LSE: BKG).
These companies have many attractive qualities. For a start, they’re all highly cash generative. Thanks to this quality, most of the sector’s constituents entered the crisis with strong balance sheets.
Fat profit margins have helped these FTSE 100 firms recover quickly from the crisis and, in some cases, pay back government support offered.
I don’t believe Taylor, Berkeley and Persimmon’s levels of cash generation are temporary. The homebuilders look set to benefit from the tailwinds of low interest rates and constricted supply for years to come. The UK’s housing market is structurally undersupplied. Despite government and private sector efforts, it remains so.
Unless there’s a surge in building over the next few years, demand will continue to exceed supply, according to my figures. This suggests home prices will continue to push higher. That may translate into continued profit growth at these home builders.
Capital growth
I reckon all of the above is good news for investors. Not just from an income perspective, but from a capital growth angle as well. Rising profits should lead to higher earnings per share, which should justify a higher stock price. Dividend growth may also lead to improved investor sentiment, another factor that could drive the price higher.
The current levels of income these FTSE 100 stocks offer appears highly attractive in the current interest rate environment.
For its 2021 financial year, Persimmon’s stock is projected to yield 8.7%, according to analysts. Similar projections suggest Taylor will offer a 4.8% dividend yield and Berkeley’s yield will be 4.1%. As noted, there’s also the potential for these yields to grow significantly in the years ahead.
Based on these projections, I’m going to be taking a closer look at these income plays over the next few days. I think they have tremendous potential, especially compared to the low rates of interest on offer from mainstream banks.
