Lately I’ve been piling into FTSE 100 dividend shares while ignoring all the headlines about chip maker Nvidia and other super soaraway US tech stocks.
It hasn’t been easy, given the hype over the Magnificent Seven mega-caps, but I’ve stuck to my guns. While UK income stocks don’t have the same pizzazz, I think these tortoises may be just as rewarding as the tech hares in the end.
I still have exposure to US tech, through my Vanguard S&P 500 UCITS ETF and Legal & General Global Technology ETF. But when it comes to buying individual stocks, I’ll continue to focus my efforts on undervalued UK blue-chips.
Income over growth
There are a heap of FTSE 100 income stocks on the market right now, trading at low valuations while offering sky-high dividend yields.
The financial sector is particularly fertile ground. Insurance conglomerate Phoenix Group Holdings now yields 10%, wealth manager M&G yields 8.46% and Legal & General Group yields 8.29%. I hold all three in my self-invested personal pension (SIPP).
High yields can be vulnerable. Companies need to keep the free cash flowing, or they die. A rising yield is often the sign of a declining share price, and none of these have shot the lights out lately.
Yet I believe their shareholder payouts may prove sustainable. They may also climb over time. This should give me both a high and rising income, which I will reinvest straight back into stocks.
If today’s yields persist, I should double my money in less than eight years, even if the share prices don’t rise at all.
Personally, I think they will, when inflation is defeated and interest rates fall. That will hit cash savings rates and bond yields, potentially boosting demand for high-yield UK dividend stocks, and reviving their share prices.
When it comes to every dividends, size isn’t everything. Weapons manufacturer BAE Systems (LSE: BA), which I bought recently, has a headline yield of just 2.32%. That’s way below the FTSE 100 average of 3.9%, and pales into insignificance compared to Phoenix.
Progressive policy
However, BAE still plays plenty of dividends, it’s just that its yield has failed to keep up with its rocketing share price. It’s up 42.13% over one year, and 179% over five years.
The board recently increased its annual dividend by an inflation-busting 11% to 30p per share, following another strong set of full-year results. BAE is forecast to yield 2.51% in 2024 and 2.71% in 2025.
It’s a great British dividend growth stock but there are still risks. If Middle East tensions ease, or US-China relations improve somehow, that could slow today’s arms race. The stock trades at 20.42 times earnings, double the average FTSE 100 valuation, so isn’t cheap.
I’m a little impatient so mostly I’m targeting stocks that pay a generous yield today. I’ve also bought Glencore, Lloyds Banking Group and Taylor Wimpey, all of which I believe will give me a solid, rising income over time. That’s hugely important to me, because I plan to build my retirement on the dividends they pay me. I won’t base my pension plans on volatile, low-yielding US tech stocks.
