Growing passive income from dividend-paying stocks is a proven way to get rich and retire early. The FTSE 100 is home to several high-yielding dividend stocks that I think are perfect for achieving this objective. However, it’s been a rough year so far for income investors.
FTSE 100 dividend cull
Some 42% of total dividend payouts from stocks within the FTSE 100 have been cut or cancelled this year. The remaining payers tend to be non-cyclical business whose revenues aren’t so dependent on the strength of the economy.
Painfully for investors, 73 of the FTSE 100 stocks are worth less than they were six months ago. The value of the index has fallen about 19% since the start of the year.
However, if you choose wisely there are great opportunities to buy dividend-paying stocks at undervalued prices. As an added bonus, as the share prices are lower, the respective dividend yields of these companies are now higher.
What to look for
I think a company’s dividend payments should be covered by its earnings by a ratio of at least 1.4. If the dividend cover is less than one, then it is at risk of being cut or suspended if the company encounters trading difficulties.
Like Warren Buffett, I like to invest in companies that have a wide ‘economic moat’. This refers to a business’s ability to maintain a long-term competitive advantage over its rivals. This is important as I invest for the long-term and prefer to leave my dividend payments to compound over time.
The current economic turmoil has highlighted the perils of investing in cyclical stocks, such as banks and oil producers. I prefer to invest in non-cyclical stocks. These companies’ earnings are less affected by the strength of the economy. The more globally diverse these companies are, the better.
The chosen two
- GlaxoSmithKline is a global healthcare behemoth that produces medicines, vaccines and consumer healthcare products. Patents for its medicines and vaccines give the company a wide economic moat. Brand loyalty ensures demand for its consumer healthcare products remains high. Its dividend yield is in excess of 5%. This is well above the FTSE 100 average of just under 4%. The dividend cover is 1.4 times the company’s earnings. It is also one of the few companies in the FTSE 100 that pays its dividends quarterly. This is a bonus for investors who rely on regular payments to fund their living expenses.
- BAE Systems produces heavy duty military equipment, including fighter jets and aircraft carriers for national governments, as well as cyber security products. The sensitive nature of these works ensures its economic moat is wide. Contracts to provide this equipment are enormous in value and long in duration, which is excellent for investors as it provides long-term visibility of future revenues and profits. The current dividend yield is just above 4.3%. The dividend cover is 1.9 times the company’s earnings.
The share prices of both these stocks are less than they were a year ago. I believe both will recover their lost value in the near future and grow their dividend payments. Investors in these stocks should therefore benefit from capital growth as well as growing income — the perfect recipe for getting rich and retiring early.
The author owns shares in GlaxoSmithKline and BAE Systems. The Motley Fool UK has recommended GlaxoSmithKline. 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.