UK dividend stocks are a brilliant way to build a high-and-rising second income for retirement. Today could be the ideal time to buy them. What makes me say that?
The FTSE 100 has shot back to form over the last year, as global investors quit their addiction to the US tech mega-caps. As fears of an AI bubble grow, investors are seeking solace in the old school blue-chips such as banks, insurers, miners, utilities and pharmaceuticals.
in particular, they like the dividends they pay. As interest rates fall, and the risk-free yield on cash and bonds falls with it, FTSE 100 and FTSE 250 income shares look even more attractive. It’s still possible to get yields of 6%, 7%, 8% or more, with any capital growth on top. But maybe not for much longer.
Top shareholder returns
UK equity valuations are climbing as the FTSE 100 bursts through the 10,000 barrier for the first time in history, and continues to power upwards. Today, the price-to-earnings (P/E) ratio for UK stock market is 19.92, up from around 15 last year. There are fewer bargains as a result.
As share prices rise, dividend yields automatically fall. A year ago, the average FTSE 100 yield was around 3.5%. Today, it’s 2.95%, still attractive, but not as good as it was.
It’s nowhere near as good as the yield available to investors who buy individual stocks rather than a tracker. Insurer Legal & General Group boasts the highest yield on the FTSE 100 at 8.15%, followed by two more financials, Phoenix Group Holdings (7.38%) and M&G (6.84%).
The shares have been buzzing too, but I’ve covered them a lot lately, so I’m keen to explore other opportunities. One is paper and packaging specialist Mondi (LSE: MNDI).
The Mondi share price has taken a battering lately. It’s slumped 23% over the last year, and 52% over five.
Mondi’s in a tough sector, as much of the demand for its product comes from e-commerce, boxing up all that stuff we buy online. But with consumers feeling squeezed, EBITDA earnings fell from €1.2bn in 2023 to €1bn in 2024. The board froze the dividend per share at 70 euro cents for the second year, while it waits for better times.
Lots of high FTSE yields out there
Despite that, the trailing yield remains a bumper 6.66%. Plus the shares are much cheaper than the FTSE 100 average, with a P/E of 12.5.
Mondi operates in a cyclical market and its recovery could take time as consumers struggle. So anybody considering this stock may have to be patient. The consolation is that they can re-invest their dividends at the new lower price while they wait for it to take off again.
This strategy won’t suit everybody. Investors may want to explore other high FTSE 100 yields, such as Land Securities Group (6.5%), British American Tobacco (5.83%), Admiral Group (5.75%) and BP (5.68%).
Some of these stocks have struggled like Mondi, but now could be a good time to consider them with a long-term view. We may not get another chance like this for a while.
