It’s great to have cash in the bank account today. But for patient investors, having less today can mean more tomorrow. This is true when focusing on FTSE 100 stocks that pay generous dividends. Here’s how someone could build up a robust portfolio that could (in theory) pay out income for life.
Ignoring the highest options
In my opinion, the trick to generating dividend income year after year from stocks is to focus not on the highest-yielding ones. Of course, a high dividend yield is very attractive. But this might only be the case for a year or so. The yield could be high because of a falling share price. If the business is in trouble, the dividend per share might be cut in the future, reducing the yield.
Rather, an investor might be better off focusing on stocks with above-average yields that are still reasonable. For example, the average FTSE 100 yield is currently 3.16%. The highest yield on offer is 10.48%. If I go for shares in the 5%-7% bucket, I think it’s a sweet spot for sustainability and generous income.
Picking companies with a good track record of paying dividends puts the investor in a better position to generate income for life. If a portfolio of a dozen stocks is held, even during rough market periods, I think someone could generate consistent income.
Of course, the risk of pursuing perpetual payments is that dividends aren’t guaranteed. Companies don’t have to pay if earnings are down, for example. Therefore, even though a track record shows intent for the future, it doesn’t mean income will definitely be paid.
Riding the waves
One example for consideration is Admiral (LSE:ADM). According to my records, it has paid a dividend every year since 2005. At the moment, the dividend yield is 5.66%.
Over the past year, the share price has risen by 28%. This outperformance has come from a few areas. Admiral’s combined ratio (claims + expenses vs premiums) has been good recently. This has come from a mix of competitive pricing and lower claims volatility. Furthermore, it has benefitted from their reinsurance model. In simple terms, Admiral can pass some risk to reinsurers at its discretion. This enables it to manage claims risk on an ongoing basis and provides more stability to earnings.
I think the dividend is sustainable primarily because Admiral operates a capital-light business model. After all, it isn’t about tying up large amounts of money in machinery, warehouses, or similar assets. At the moment, the dividend cover ratio is 1, which means the earnings per share can completely cover the dividend per share.
One concern is the regulatory environment. The Financial Conduct Authority (FCA) has the power to change policy that could negatively impact Admiral, pushing up compliance costs or risking fines.
Even with this risk, I think it’s worth thinking about for any investor looking to build passive income for life.
