FTSE 100 dividend stocks are a brilliant way of generating both capital growth and passive income for retirement.
Investors get growth when share prices rise, and a second income on top from the regular stream of dividends most blue-chip companies pay investors as a reward for holding their stock.
New investors often underestimate the value of the shareholder payouts. When I started out, my focus was purely on growth. I didn’t notice the small, regular payments trickling into my Stocks and Shares ISA, typically paid twice but sometimes four times a year.
FTSE 100 dividend heroes
Luckily, I had set my online trading account to automatically reinvest them straight back into the same stock, and slowly, steadily I noticed something. Those dividends were rolling up. They were compounding and growing, and adding to my total return.
Sometimes, I was down on the actual share price, but found myself up overall, thanks to those reinvested dividends.
Dividend yields vary greatly. Fast-growing companies may only offer income of 1% or 2% a year, while some income stocks can yield as much as 8% or 9%. Both have their place in a well-balanced portfolio.
I hold several stocks with ultra-high yields, including insurer Phoenix Group Holdings, which has a trailing yield of 7.8%, and Taylor Wimpey, which yields 9.3%, the biggest on the FTSE 100.
Halma grows steadily
I used to turn my nose up at stocks like Halma (LSE: HLMA), which has a tiny trailing yield of just 0.72%. Yet the global health and safety tech specialist has a brilliant track record of increasing dividends year after year.
The group has increased its annual dividend by at least 5% for an incredible 45 years in a row. Over the last five years, the average increase has been just shy of 7% a year.
The reason the yield is so low is that the share price has been growing strongly. When a stock rises, the yield falls, through simple maths.
The Halma share price is up 25% over the last 12 months, but over the last decade it’s more than tripled, with all dividends on top.
Of course, there’s no guarantee it will triple again over the next decade. There never is with shares. Halma looks expensive today, with a price-to-earnings (P/E) ratio of 35. That’s much higher than the P/E of 15 seen as fair value.
As an international company, Halma is at the risk of exchange rate movements and tariffs, but I think it’s still worth considering with a long-term view.
Investing for retirement
When buying dividend stocks, it’s the long term that matters. Let’s say a 30-year-old had £10,000 in their ISA and started investing £100 a month on top. We’ll also assume they increased that sum by 5% a year, to protect against inflation, and generated an average annual return of 7% a year. By age 67, they’d have £155,097.
If their portfolio had an average yield of 5%, this would give them a passive income of £7,755 a year. And that’s without touching their capital. The more they invest when they’re younger, the more income they’re likely to generate. A balanced portfolio of around 15 to 20 FTSE 100 shares, offering income and growth, can transform retirement. It won’t happen overnight though.
