I get two clear benefits from investing for income. First, the income from high-yielding FTSE 100 stocks provides me with protection from the risk of declining share values during the more volatile market periods. Secondly, my portfolio returns are enhanced through my reinvestment of the dividends I receive. As such, when I’m selecting stocks, strong income payers are most attractive to me.
Dividend outlook for 2023
Consensus outlooks for FTSE 100 dividends in 2023 are not as rosy as the bumper year I witnessed in 2022. With a more bearish outlook for dividends, my ability to find the best income stocks is more crucial than ever. So, which are the best stocks I think the FTSE 100 has to offer?
Highest-yielding FTSE 100 stocks
Housebuilders like Persimmon plc (7.7%) and Taylor Wimpey plc (7.8%) have some of the highest yields across the main index.
Financials also look good — FTSE 100 insurers Phoenix Group (8.3%), Legal & General plc (8%), Aviva plc (8.1%), and M&G plc (9.9%) are all offering inflation-busting forward dividend yields.
Meanwhile, the miners have representation through Glencore plc after some record payouts by some of the dominant companies within that sector.
Though these are the highest-yielding dividend paying stocks, it certainly doesn’t mean they’re the most suitable income stocks for me.
Best quality
With income investing it’s tempting to be distracted by the high yields. Of course they don’t tell the full picture.
Let me use recent FTSE 100 mining payouts as an example. They have been a powerful engine of growth over the last two years but are forecast to fall. Some miners made record profits and investor payouts in 2022 — the year-on-year dip could be quite sizeable.
Meanwhile for housebuilders, I think yields have risen because investors have been selling the stock. This could be for two reasons: rising interest rate expectations and the deterioration of the UK housing market. It’s a riskier play. Maybe the homebuilders may not be as attractive as they seem on the surface.
Surprisingly, the financials sector looks most appealing to me. I used to think this sector was stingy. Hopefully, though, the central bankers are correct that inflation has peaked. Because if higher inflation sticks around it will increase the liabilities of the underlying companies, and eat into earnings.
Best of the FTSE 100 insurers
All things being well, the stocks I believe have the most long-term promise are Aviva and Legal & General. I am noting a strong trend of growing payouts alongside a low valuation for both companies. Both are in bargain territory.
The trap I’ve fallen into before is buying a high-yielding company only to find out the dividend was being funded with capital reserves. Fortunately, in both Aviva and L&G’s case, the dividend cover is nearly two times. This is high for financial companies and suggests stability.
I think FTSE 100 insurers pay well and look cheap. Rising interest rates boost the profitability of these companies, so it’s a great interest rate hedge.
However, I see road bumps ahead. It’s likely to be a year of increased volatility for the insurance sector, with the potential for periodic scares, most notably around inflation. Certainly, it’s something I must factor into my decision to buy or not. But buy, I think I will.
