I believe dividend stocks are the way to go when building a long-term investment portfolio. Dividend payouts allow long-term holders to add to the bank account without having to sell shares. The FTSE 100 index has rebounded well in the last year, and the average dividend yield of the index is above 3.5%. But, here are two FTSE 100 dividend stocks that offer a much higher yield. I think they show good growth potential too, so I’m considering them for my portfolio.
9.3% yield in the housing sector
UK housing giant Persimmon (LSE: PSN) looks like a bargain to me right now. The demand for homes in the UK continues to rise, driven by the pandemic. Businesses in the UK and abroad are increasingly looking at work-from-home as an alternate to working in the office. This makes living spaces much more important to the young, working population.
Persimmon’s share price reacted poorly to the first-half (H1) 2021 results released in August. Its shares are down 17.8% in the last six months and 7.8% in the last month alone. Despite a strong showing so far in 2021, I think the cyclical nature of the housing market has cast a cloud over the Persimmon share price. The silver lining is, it offers an excellent entry point at 2,570p today.
Sales during H1 2021 was up 9% to £2.23bn compared to H1 2019. Pre-tax revenue too went up to £480.1m from £291.4m (H1 2020). With a large cash reserve of £1.32bn, its 9.3% yield is well covered by earnings. Also, analysts predict housing demand to extend into 2023, which I see as another positive for Persimmon.
But, if there is a dip in the market, investors could force a mass exodus, which is a major concern. The housebuilding sector has its phases and we are currently ending a decade of booming house prices. A dip in the near future will prompt sellers to retract listings, which could snowball into a long lull.
However, I think the 9.3% dividend yield could plaster over any further slumps in share price. Despite a strong negative trend in recent times, I think the FTSE 100 dividend stock has good recovery potential. Because of its strong position in the UK housing market and predicted sales over the next few years I expect Persimmon to offer steady income even in a slight market slump.
FTSE 100 dividend legend
British American Tobacco (LSE: BATS) looks like an incredible bargain to me at the moment. Trading at 2,520p, the tobacco company’s shares are down 7.3% in the last 12 months. Its profit-to-earnings (P/E) ratio of 9.3 points to an undervalued share with growth potential for my long-term portfolio.
Combine this with the 8.5% dividend yield and two decades of steady dividend increase, this stock jumps right into my list of FTSE 100 dividend stocks to buy today.
However, its performance in the market in recent times has been underwhelming. This is despite posting strong revenue figures which grew 8.1% in H1 2021 to £1.2bn. Also, the company is subject to increasing taxation in overseas markets which makes up a large percentage of sales. This is a concern, factoring in dropping global tobacco sales as well.
But, the history of dividend increases and the current 8.5% yield makes BATS an exciting option for steady passive income. I would definitely consider a £1,000 investment in BATS shares today to grow my income portfolio.
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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.