I’ve recently been looking for FTSE 100 income stocks to add to my portfolio.
I think a range of blue-chip companies in the index could be great additions to my portfolio. Some stocks even offer yields of 6% or more.
Here are three such enterprises, which I’d buy as income investments.
FTSE 100 income
The first two stocks on my list are tobacco groups Imperial Brands (LSE: IMB) and British American Tobacco (LSE: BATS).
Ethical considerations aside, these two firms have proven themselves to be outstanding income stocks over the past decade. Despite falling cigarette sales worldwide, the two enterprises have remained highly profitable, generating more than enough cash to cover their dividend payouts.
Indeed, according to Imperial’s results for the six months to the end of March 2021, the company earned an operating profit of £1.6bn in the period, up 77% year-on-year. This supported a 1% dividend increase.
As well as returning £1bn to investors with dividends, the company was also able to reduce debt meaningfully after the sale of its premium cigar business.
Meanwhile, for the year ended 31 December 2020, British American earned an operating profit of nearly £10bn, up 11% year-on-year. Off the back of this growth, management could hike the firm’s full-year dividend by 2.5%.
After these dividend increases, shares in Imperial offer a yield of 8.6% while British American yields 7.8%.
That said, these FTSE 100 income stocks do face some unique challenges. Tobacco consumption around the world is declining. This could hurt their cash flows in the long run. Falling cash flows could put their profit margins under pressure, and as a result, management may have to slash the payouts.
Another challenge is debt. Both companies have a lot. A sudden increase in interest rates could increase the cost of this debt and reduce profits.
Despite these risks and challenges, I would buy both FTSE 100 dividend stocks for my portfolio today.
Expansion plans
Another top FTSE 100 dividend stock I’d buy is Phoenix Group (LSE: PHNX). With a yield of 6.7% at the time of writing, this company has one of the highest yields in the blue-chip index. Usually, this could be interpreted as being a warning sign. Imperial and British American have high yields due to their tobacco exposure.
However, with Phoenix, I believe the stock’s yield is higher than average because it’s difficult to understand. The company buys books of life insurance and pension policies. It then manages these policies to produce cash either by keeping costs low or paying a low price in the first place.
The cash generated is then used to fund the dividend and support more acquisitions.
Due to the complexity of the business model, this company might not be suitable for all investors. In addition, Phoenix’s balance sheet is difficult to understand, and it could be exposed to significant losses in a sudden market sell-off or if there is a rapid increase in interest rates.
Still, even after taking these risks and challenges into account, I would buy the FTSE 100 company and its market-beating yield for my portfolio of income stocks.
