Collecting dividend income from FTSE 100 shares can be a decent way to build wealth.
However, successful dividend investing may not be as simple as picking the highest yielders. In fact, an ultra-high yield can sometimes be a warning sign of trouble ahead.
Therefore, it’s important to choose shares with care and after undertaking thorough research of the underlying business.
Risks and opportunities
And it’s not great to be holding shares when dividends face an unexpected cut. In many cases, an unforeseen cut in dividends can cause a drop in the share price. So that’s a potential double hit to a portfolio involving a decline in capital and a reduction in income.
However, although there are risks to holding shares, there’s often positive potential as well. Many firms actually increase the shareholder payment each year.
And when that happens, share prices tend to rise a bit to maintain the valuation and accommodate the improving performance of the business. So that’s a potential double gain for investors from rising capital and an increase in income.
But an enduring and rising stream of dividends is usually backed by a solid record of positive revenue, earnings and cash flow. In short, the characteristics found when businesses are successful and growing.
And I tend to hunt for reliable dividend-paying companies in sectors that have defensive qualities. So that means targeting businesses that can remain robust despite the ups and downs of the general economy.
But the more-cyclical enterprises tend to sport the highest dividend yields. And they can be tempting. However, the risk of a dividend reduction down the road is often greater. And that’s because revenues, profits and cash flows tend to ebb and flow along with general economic conditions.
Three stocks I’d choose now
However, all stocks carry risks as well as positive potential. And that includes defensive operators with a strong financial and trading record. Indeed, it’s possible for me to lose money on my dividend-company stock picks.
Nevertheless, to target an equivalent of £100 monthly income from FTSE 100 shares, I’d consider stocks like energy company National Grid. With the share price near 1,071p, the forecast yield is around 5.4% for the trading year to March 2024.
And I like Unilever, the fast-moving consumer goods business with powerful and well-known brands. With the share price near 4,244p, the anticipated yield for 2024 is about 3.8%.
I’m also keen on biopharmaceutical company GSK. With the share price at 1,432p, the forecast yield for 2024 is just above 4%.
The average yield of those three stocks is 4.4%, though dividends are never guaranteed and past performance is not an indicator of future results. Assuming it’s possible to achieve that as an overall portfolio yield, I’d need to invest about £27,273 to achieve a dividend income equivalent to £100 a month.
Right now, though, I don’t have a sum like that on hand to invest. Therefore, I’d aim to build up the value of the portfolio by reinvesting dividends along the way.
