I’m building a balanced portfolio of FTSE dividend shares to generate the passive income I need to enjoy a comfortable retirement. But what if I could only buy one? In that case, I’d have to take a very different approach.
A one-stock portfolio might offer some advantages. I could go for a super-high-yielder, like wealth manager M&G, and bag a whopping income of almost 9% a year. While M&G’s shareholder payouts appear secure for now, that’s still a risky strategy. Plus its share price has struggled to grow.
Alternatively, I could play relatively safe and buy transmissions monopoly National Grid, which currently yields 5.47%.
Yet the utility’s share price crashed in May after it announced plans to raise £7bn to accelerate its transition to renewable power. It has net debt of more than £40bn, and I’m not comfortable with that. So I wouldn’t buy National Grid on its own either.
I’d buy Lloyds Banking Group
Unilever is another solid FTSE 100 blue-chip I’d consider for my one-stop portfolio, but it doesn’t pay enough income, currently yielding less than 3%.
Oil giant BP yields 5.39%, which is good. Its shares are dirt cheap too, trading at six times earnings. Yet the energy sector is cyclical, oil exploration is risky and we still don’t know how BP will negotiate the shift to net zero.
I’d happily hold all four of these in a portfolio of dividend income and growth stocks, but I wouldn’t make them my sole picks. If I had to choose just one stock for life, it would be Lloyds Banking Group (LSE: LLOY).
I know, I know, that’s a bit dull. But in a way, it has to be dull. My nerves would be in shreds if I bought one stock and it was all over the shop.
But this doesn’t mean Lloyds will avoid the swings and roundabouts that comes with investing in equities.
Top FTSE 100 dividend growth stock
As we saw in the financial crisis, things can still go badly wrong. Although I’d like to think we’ve learned from that. We certainly learned that the big banks are too big to fail, and must be rescued if required.
I’ve chosen Lloyds over the other FTSE 100 banks because it sticks to the basics of personal and small business banking, which reduces its risk profile. It’s still exposed to the ups and downs of the UK economy, which has been very bumpy lately with Covid, the cost-of-living crisis and everything else. But when investing in shares, it’s impossible to avoid risk together.
The Lloyds share price looks good value trading at 7.4 times earnings, roughly half the FTSE 100 average of around 15 times. That’s despite the stock climbing an impressive 36.3% in a year. The trailing yield has shrunk as a result though, to just 4.8%.
However, management is aiming to increase dividends year after year, and the forecast yield is more impressive at 5.6%. Better still, that’s covered twice by earnings, which is pretty comfortable.
As I said, it will be madness to invest in just one stock. But if someone put a gun to my head, my sole passive income pick would be Lloyds.
