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3 FTSE 100 dividend stocks I’d buy with my last £1k

If I had to pick just three stocks in which to invest my last £1,000, I would seek out the FTSE 100’s top income stocks. 

Today, I’m going to highlight the companies I might pick, and explain why they could be an attractive place to invest your hard-earned funds.

Global giant

I think every investor should have some exposure to commodities in their portfolio, and Rio Tinto (LSE: RIO) is by far the most attractive income stock in the commodities space according to my research.

There’s a lot to like about this company. Not only is it the world’s largest iron ore producer, with some of the best profit margins in the commodity industry, but it has also established itself as one of the FTSE 100’s top dividend stocks over the past few years.

Improving efficiency and cash generation have been management’s two key goals recently and they have done exceptionally well on both fronts. The group’s operating profit margin hit 43% in 2018, up from just 10% in 2015. At the same time, free cash flow per share has risen from just $1.10 in 2013 to $3.70 for 2018. 

Management has decided to return the bulk of this cash to investors. A total of $9.8bn was paid out in 2018 — that includes a $4bn special dividend. 

As long as the company doesn’t decide to take on any costly expansion projects, I expect this trend to continue. City analysts have pencilled in a dividend yield for the company of 5.8% for 2019 and 5.4% for 2020.

Slow and steady

A high dividend yield is not always the mark of a good dividend stock. Sometimes the best dividend stocks are those companies with low yields and low payout ratios as these dividends are generally more sustainable over the long term. With this in mind, I reckon Associated British Foods (LSE: ABF) might also be a tremendous income investment.

With a dividend yield of just 2.1% at the time of writing, the stock doesn’t look particularly attractive from an income perspective. However, the distribution is covered nearly three times by earnings per share and has grown steadily at a rate of 7% per annum for the past six years.

According to my calculations, even if earnings per share remain constant, ABF can continue to increase its annual payout at this rate without running into any problems for the next 10 to 15 years. Only adding to the investment case is a net cash balance of £615m.

Money management

My final FTSE 100 dividend pick is Schroders (LSE: SDR). I see it as a great way to play the UK’s growing and ageing population. 

As the population continues to rise, the demand for pensions and savings products is only going to increase. Schroders is one of the most recognisable wealth management brands in the UK, so it should benefit more than most from this trend.

Management has steadily been increasing the amount of money the company returns to investors over the past six years. The dividend has increased from 58p per share to 114p per share, leaving the stock supporting a dividend yield of 4.2% at the time of writing. 

Analysts don’t expect distribution to increase much more during the next two years, but it is covered 1.8 times by earnings per share. The company also trades at a relatively attractive forward P/E of 13.4. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.