A dividend stock with a high yield can indicate that investors are expecting lower payouts in future. But it can also be a sign that a stock is trading at a decent price.
Share prices have been falling in both the UK and the US this year. As a result, I think that there are some attractive dividend stocks on offer in the FTSE 100.
If I were investing £1,000 today, I’d look to buy stocks across a few different sectors. This would allow me start building passive income while helping limit my risk.
UK stocks
At the moment, there are three FTSE 100 stocks that stand out to me. These are Legal & General, National Grid, and Rio Tinto.
Legal & General is a great example of a rising dividend and a falling stock. The stock has fallen by around 19% since the start of January.
The company’s dividend, though, is forecast to increase from 19.4p this year to 20.3p next year. That implies a yield of 8.2%.
I think that the company stands to benefit from the rising interest rates that we’ve seen this year, too. Higher rates mean higher returns on the bonds it is invested in.
National Grid is in a similar position. The company’s share price has gone from £10.78 at the start of January to £9.95 today.
The company’s dividend, however, continues to increase. As a result, the dividend yield on National Grid shares has gone from 4.5% at the start of 2022 to 5.1% today.
Management is forecasting earnings growth of 6%-8% per year as it shifts towards renewables infrastructure. This leads me to think the dividend should remain secure for some time.
Rio Tinto doesn’t exactly fit the mould, here. The stock is actually up 13% this year.
Furthermore, the dividend is expected to decline next year from $7.22 in 2022 to $5.65 in 2023. Nonetheless, I’d buy the stock today to start generating passive income.
At £55 per share, the dividend on offer looks like it could be around 9%. So despite the decline, this still looks like a stock with a high yield.
Diversified passive income
If I were investing £1,000 today, I’d look to invest £500 into Legal & General. At today’s prices, that would buy me 201 shares, which should generate £40 in passive income in 2023.
With National Grid shares, I’d invest £300 to buy 30 shares. In 2023, I’d expect that to produce around £16 in dividends next year.
Lastly, I’d use the remaining £200 to invest in Rio Tinto. Buying the shares today would get me 3.5 shares and I’d expect to receive £18 in dividend income in 2023.
Spreading my investment across different stocks means that I shouldn’t lose everything in the event of a problem with any one of them. And the resulting portfolio still has a high yield.
Overall, the dividend yield would be 7.4%. Reinvesting at those rates for 30 years would turn £1,000 into £8,500 after 30 years, which is a good enough return for me.
