I’m building up a portfolio of FTSE 100 dividend income stocks to supplement my State Pension when I retire. Now looks like a good time to buy them, as there are plenty of ultra-high-yielders out there.
If I divided this year’s £20,000 Stocks and Shares ISA allowance equally between the following five stocks, I’d get a super-high income from day one. With luck, it would rise over time if I reinvested all my shareholder payouts, and companies increased their dividends as profits and cash flows increased.
It’s important to stress that dividends – in contrast to savings rates – aren’t guaranteed. Companies have to keep making money to keep paying them. That’s why I buy a mix of stocks, to spread the risk.
My favourite UK shares
Over the last year, I’ve bought a string of FTSE 100 blue-chips with high trailing yields.
I’m a huge fan of insurer and asset manager Legal & General Group. Recent share price performance has been lacklustre, but I can console myself with its whopping 8.01% yield, one of the highest on the index.
But it’s not the absolute highest. Another of my recent purchases, wealth manager M&G, yields 9.69%. And that’s beaten by insurance conglomerate Phoenix Group Holdings, which pays a stonking 10.57%. It’s a happy day when their dividends hit my trading account.
However, near-double-digit yields are risky. Vodafone Group currently yields more than Phoenix but it won’t next year. Its dividend will be slashed in half in 2025.
I’ve done my due diligence on these three and think their payouts are safe, but there’s a chance I could come unstuck. No guarantees, like I said.
All three of these portfolio holdings are in the financial services sector. I think their prospects will improve once interest rates are finally cut and the economy picks up (whenever that is). However, there’s concentration risk here, which I have offset by investing in other sectors, too. Diversification is key.
I’d add housebuilder Taylor Wimpey to this year’s high-income ISA portfolio. It currently yields 6.61%.
FTSE 100 bargain
For number five, I’ll pick one I don’t own, but wish I did: global mining giant Rio Tinto (LSE: RIO). This currently yields 6.26%. Once again, I’d be getting income that’s comfortably above the FTSE 100 average of 3.8%.
Rio Tinto looks good value, judging by its price-to-earnings ratio of 9.6%. That’s some way below the FTSE 100 average of 12.7 times.
I accept this is a tough time for the commodities sector as Chinese steel demand slows. The West is hardly in a position to pick up the slack. The Rio Tinto share price is up just 7.18% in the last 12 months.
Rio is well placed to benefit from the soaring copper price. In 2023, it produced 562,400 metric tonnes. The board hopes to lift that to 1m tonnes annually within five years. Natural resources stocks are cyclical, so I’d rather buy today, when the Rio Tinto share price is under a bit of pressure. I’ll add it to my Stocks and Shares ISA the moment I have the cash.
My five stocks would give me an average yield of 8.23%. On a £20k ISA, that would deliver a brilliant income of £1,646 in the first year alone. With luck, that will only be the start.
