The average divdiend yield of the S&P 500 is 1.15%. This is significantly lower than the FTSE 100 and might put some people off. However, there are a lot more companies in the S&P 500. The yield can quickly ramp up by actively picking high-yielding options and dropping firms that don’t pay any income. Here’s how an investor could look to allocate money using this strategy!
Strategy steps
In a similar way to picking UK dividend stocks, my first action is to filter a list around my target yield. At the moment, I think a 6%-7% yield is strong for a portfolio, without having a crazy level of risk. Can I take this filter and find enough companies in the S&P 500? Absolutely.
There are currently 10 companies that meet this target yield. The stocks range in terms of sector and geographic exposure. This can act to diversify the portfolio, so that even if one company underperforms or cuts its divdiend, the overall impact is minimised.
The £10k lump sum could be invested all at once, or drip-fed over a few months. The advantage of doing everything at once is that the first dividend payment will come sooner than if £1k was invested in a stock each month. However, the advantage of the latter method is that it allows someone to take advantage of market opportunities that present themselves further down the line.
For now, let’s assume the £10k is deployed across the 10 stocks simultaneously. The exact yields will depend on when the trades are booked, but let’s estimate an overall yield of 6.5%. From there, dividends can be reinvested, helping compound the portfolio’s gains over time.
If this were kept up for 20 years, the person would be receiving just under £2,300 each year, even without having invested a penny more than the initial £10k! However, if someone wanted to speed up the process, they could allocate a further £250 a month after the £10k had been put to work. In this case, by year seven, the annual income payments would exceed £2.3k.
A pharma giant
Of course, predicting future dividend payments is tough. That’s why stocks that have a strong track record are appealing. For example, consider Pfizer (NYSE:PFE). The stock has a yield of 6.35%, with the share price up 23% in the past year.
Pfizer is one of the world’s largest pharmaceutical companies, focused on discovering and developing medicines and vaccines. When it comes to the dividend, Pfizer has long been a favourite among income investors. The company generates substantial free cash flow, even outside of pandemic-era peaks, which helps support dividend payments.
Looking ahead, the outlook should support income payments. It’s leaning heavily into growth areas like oncology and weight-loss treatments, which have a large, growing market to cater to. As new drugs move through late-stage trials and toward approval, there’s a steady pattern of potential revenue drivers.
Of course, there are still risks. Patent cliffs are a constant threat, which is when key drugs lose exclusivity. Revenue can drop sharply in these cases. However, I think it’s a US income stock for investors to consider as part of this strategy.
