Dividend stocks are one of the few true forms of passive income, in my view. Even so, investors need to be fairly confident that those selected actually have a decent chance of doing the business for holders. Today, I’ve picked out three FTSE 100 stocks that, based on their track records and market clout, I’d buy for my own dividend portfolio.
For ethical reasons, defence giant BAE Systems (LSE: BA) might not be every investor’s cup of tea. Nevertheless, I continue to believe this is one of the best passive income generators in the entire index. Currently down to return 24.6p per share this year, BAE yields 4.4% at the current share price.
Could I get more elsewhere in the FTSE 100? Absolutely. However, BAE offers that combination of things I look for in a passive income stock. Namely, a decent yield, covered well by profits and increasing on an annual basis.
Some may quibble that dividend increases are pretty small (2-3% per year). I’d reply that consistency is far more important. A stagnant payout suggests a company’s treading water.
One risk that I do need to be aware of is that defence spending can prove rather lumpy. Moreover, BA looks to be rather dependent on a few select customers/nations. Having said this, the prospects for its cybersecurity arm look very positive indeed. Good business here should keep dividends increasing over the medium-to-long term.
When looking for relatively secure ways of generating a passive income, I think it makes sense to own at least one utility. For me, National Grid (LSE: NG) has long been the go-to option here. Like BAE, the £32bn-cap power provider has been another reliable (albeit modest) dividend hiker over time. True, investors shouldn’t put too much weight on past performance. However, nor should it be discounted completely.
A 50.2p per share handout this financial year equates to an electrifying 5.6% yield. For perspective, I’d only get 0.6% from a Cash ISA right now. Considering the damaging effects of inflation, I think this makes hoarding pounds and pennies far riskier.
Some may be concerned by the fact that dividends aren’t covered all that much by profits. The ongoing costs involved in maintaining infrastructure may be similarly unappealing. Personally, I don’t see either as an issue due to the predictability of earnings National Grid generates. It’s still a solid buy for me.
A third and final FTSE 100 stock I’d buy for passive income is drinks giant Diageo (LSE: DGE). At first glance, that may seem an odd choice. Returning ‘just’ 2.1%, Diageo is easily the lowest yielding stock discussed here. It’s also below that offered by the FTSE 100 as a whole (3.5%).
With this in mind, I’d understand why passive income hunters may not be interested. The valuation of 27 times earnings also feels well up to date with the recovery in consumer behaviour.
However, the presence of many cyclical stocks in the index (eg banks, property, mining and oil) leads me to believe the Guinness owner might actually offer a better risk/reward trade-off. Premium alcohol isn’t going out of fashion, after all. Diageo boasts a huge range of ‘sticky’ brands that drinkers pay up for even in difficult times.
Throw in a superb track record of raising the payout and the mega-cap screams ‘core holding’ to me.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and National Grid. 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.