The Motley Fool

Building a second income? 1 FTSE 100 dividend stock I’d buy and hold today

With a multitude of bank accounts paying 0% interest, many are looking for a way to gain a real return on their money and gain a valuable second income. Remember that you do need your money to be earning around 3% to keep up with real inflation. I’d like to share with you some ideas where you can have some tasty dividends paid into your bank account and, on top of that, the chance of a juicy capital gain.

The first share I will mention is ITV (LSE: ITV). Not only does this have a tasty 7.23% dividend yield, bashing every current account out there, the dividend is covered 1.93 times by the cash it earns. This beats many other FTSE 100 companies, some of whom only have cover of 1.3 times. It took me a while into my investment lifetime to realise the importance of dividend cover yet it is vital. There is no point being seduced in by a high dividend if it is cut.

I own ITV myself, purchasing at 106p including stamp duty and buying fees in June 2019. At the time of writing, the shares trade at 110.6p. I believe that fan-favourite shows such as Love Island and Coronation Street can help boost the TV player up to at least 140p. A 140p price would lead to the price-to-earnings ratio being around 8.1, still a low figure for the media sector.

Another FTSE 100 dividend giant I own is Imperial Brands (LSE: ITV). The cigarette supplier currently boasts a big dividend yield of 9.5%, which is much higher than it has been historically and in this sector is very good. On top of this, Imperial Brands has a commitment to increase its dividend by 10% every year, a track record it has kept up since at least 2014.

Sure, the dividend cover might be slightly low at 1.45, yet Imperial Brands is making plenty of investment into e-cigarettes, which could further boost its earnings. In contrast to ITV, Imperial Brands has worldwide exposure, selling its products in many countries.

Additionally, Imperial Brands has employed a director with experience in the recreational drug industry, which has huge potential.

Some people will not invest in cigarette shares for ethical reasons, which may lower the price for other share investors. Despite myriad health warnings, I still see plenty of people smoking in the UK and new vape and e-cigarette shops are opening, attracting a younger demographic. E-cigarettes have the added bonus of being around 95% less harmful than standard cigarettes.

I would put Imperial Brands firmly on the watchlist of shares to look at. It has recovered recently from its year low of 1,821p to be trading at 1,976p at the time of writing. Three years ago the company was trading at over 4,000p, and I can certainly see scope for the price to rise from where it is today over time.

So hopefully these two shares provide food for thought for giving you a second income. I’ve experienced the feeling of having dividends flow effortlessly into my bank account for over 14 years now, and it’s a great feeling.

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy current dividend yield of around 6% that has got our Motley Fool UK analyst champing at the bit! Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”. Click here to claim your copy of this special report now — free of charge!

Mark Howitt owns shares in ITV and Imperial Brands. The Motley Fool UK has recommended Imperial Brands and ITV. 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.