Dividend investing is back. Many FTSE 100 companies have reinstated dividends and dividend yields are rising too. In other words, I have plenty of lucrative choices to earn a passive income now.
There is a catch here, though.
Dividend yield vs longevity
The biggest dividend payers are tobacco stocks like Imperial Brands and British American Tobacco. But they are not without their challenges.
Both their share prices are falling. This is less of a problem for Imperial Brands, whose high 9%+ yield ensures net gains despite this. With British American Tobacco, however, we are assured a net loss for now.
As tobacco regulations get tighter, they are developing next-generation products like vapes. But, these are also facing hurdles.
My point is, that the passive income from these dividend stars either does not compensate for the capital loss suffered because of their falling share prices or cannot be guaranteed because their future is unclear.
Lack of clarity about the future is also true for the oil biggie BP, which has a healthy yield of 6.4%. As the world moves towards clean energy, it too is pivoting from polluting fuels. But whether it will be successful remains to be seen.
These examples tell me that there is a trade-off between a high-dividend yield and confidence in the company’s long-term future. When I am looking at earning passive income forever, however, the likelihood of a long-term future is crucial to me.
Looking towards utilities
So, I would much rather buy stocks that have a relatively lower dividend yield but are dependable. My pick would be utilities.
Especially as we come out of the corona crisis, stock market crash and recession of last year, I have renewed appreciation for dependable stocks.
FTSE 100 utilities like National Grid, SSE, Severn Trent, and United Utilities are stocks I would consider now. All of them have 4%+ dividend yields and a history of paying dividends too.
Among these, National Grid and SSE have the best yields of 5.3%. However, my one reservation about SSE is that it turned in a net loss for the financial year ending 31 March 2020.
Note that this does not cover the corona crisis. It has acknowledged that there will be a hit to operating profit because of the pandemic, which could mean another year of net loss. That does not sound like a healthy situation for dividend longevity.
National Grid too has had its challenges, including the regulator’s ruling that could slash utilities’ returns. But the FTSE 100 energy provider has relatively healthy financials compared to SSE.
Similarly, Severn Trent and United Utilities, the two water and wastewater utilities, have maintained financial strength despite a hit from the pandemic. Their dividend yields are at 4.4% and 4.1% respectively, however, lower than that for National Grid.
FTSE 100 shares to buy
Still, for now, I think these three shares (National Grid, Severn Trend, and United Utilities) have a better chance of earning me long-term passive income. I would buy them.
