The best flexible Cash ISA interest rate on the market at the moment is just 1.36%. By comparison, more than a third of FTSE 100 stocks offer dividend yields of more than 5%.
With this being the case, today I’m going to explain how you can get an 8% return on your money by using FTSE 100 dividend stocks.
Looking for income
According to my research, there are 22 companies in the FTSE 100 that support dividend yields of more than 6% right now. Some of these don’t look to be particularly attractive income investments, because they are facing substantial challenges that could lead to a sudden drop in income in the years ahead.
However, other businesses such as insurance firm Admiral and marketing group WPP look really attractive to me as income investments at the current level.
Both of these companies support dividend yields of around 6%, with payouts covered by earnings per share.
Other FTSE 100 stocks offer much more in the way of income. Take insurance group Aviva, for example. Analysts have this company yielding 8.2% next year with payout cover of nearly two times. On top of this market-beating dividend yield, the stock also trades at a highly attractive valuation of just seven times forward earnings.
Meanwhile, homebuilder Taylor Wimpey and Persimmon are said to offer investors dividend yields of around 10% next year. This makes them some of the highest-yielding stocks in the whole FTSE 100.
A basket of income
I think the best way to get a steady income from these FTSE 100 stocks is to buy a basket of them for your portfolio. This approach should give you a steady income stream from these stocks while reducing the risk that you will pick a bad investment. The approach will also minimise the impact any dividend cuts will have on your income stream as there will be other companies left in the portfolio to pick up the slack.
Using this method, I calculate that you could get a dividend yield of 7.7% from the top 10 FTSE 100 dividend stocks with dividend cover more than 1.5 times. The average yields of the stocks included range from 10.5 for Taylor Wimpy to 6.3% for insurance group Phoenix.
I believe this is the best way to build an income stream from FTSE 100 stocks that can beat the returns available on any Cash ISA on the market today. If you are not interested in buying single shares for your portfolio, you can get a yield of nearly 7% by buying a high-yield fund.
The iShares UK Dividend UCITS ETF, which manages a portfolio of 50 of the highest yielding stocks in the FTSE 350, currently offers its investors a dividend yield of 6.7% and the average P/E multiple of the stocks in its portfolio is just 10.2.
Seven of the top 10 holdings in the portfolio are FTSE 100 stocks, so this is a great way to gain exposure to FTSE 100 income with a bit more diversification at the click of a button.
For investors who are not comfortable picking their own income investments, this could be a strong alternative.
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Rupert Hargreaves owns shares in Admiral Group. The Motley Fool UK has recommended Admiral Group. 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.