Many UK investors naturally focus on the FTSE 100 and FTSE 250 when it comes to trying to make a second income from dividend shares. However, the S&P 500 offers an alternative source of income stocks that might have previously been ignored by some.
Given the scope of juicy options this opens up, how could I go about building a portfolio with shares from across the pond?
Using the same principles
My filtering process is much the same for the US stock market as it is for the UK. It begins by examining the dividend yields of individual constituents. I’m not looking for stocks around the index average yield (1.13%), but rather companies that can offer a more generous yield.
Further, given I’m also comparing yields to UK equivalents, I want to target companies in what I believe is the sweet spot of 5%-7%. This area provides good reward while still balancing the risk out. Typically, the higher the yield, the riskier the stock is, which is why I’m sceptical when the yield’s above 10%.
Fortunately, there are plenty of household names that fit into this bracket. Some examples include HP (6.34%), Pfizer (6.45%) and UPS (5.62%).
I believe an average yield of 6% is achievable, with a diversified number of stocks from the index being held over time. Let’s say someone could invest £500 a month in the relevant S&P 500 stocks. After 16 years, the portfolio could be worth £161.8k. This means that in the following year it could pay out £809 on average each month.
It’s worth noting that dividends aren’t guaranteed. Even with a diversified portfolio, there can still be a negative drag when companies cut the income payments due to underperformance.
Making connections
One example to consider for the portfolio is Verizon Communications (NYSE:VZ). It’s one of the largest telecom companies in the US, with a current dividend yield of 5.55%. The share price is up 14% in the last year.
The company’s doing well right now under the leadership of new CEO Dan Schulman, the former chief of PayPal, who’s pushing through a multi-billion-dollar cost-saving plan for the coming years. This should boost profitability.
The latest quarterly results from last month also showed the company gained a net 616,000 postpaid phone connections in the period, indicating strong client demand. It’s this kind of demand that leads me to conclude the dividend isn’t under any threat in the near term.
It generated free cash flow of $20.1bn last year, with a high dividend cover ratio above 1, providing further signs that income payments shouldn’t be an issue. However, in terms of risks, Verizon does have strong competition in the sector. Firms such as AT&T and T-Mobile price aggressively, so they could easily take market share away if Verizon doesn’t stay alert.
Overall, I think it’s a good company to consider as part of a US income investing strategy.
