Company dividends are a great way to earn passive income and the FTSE 100 index is home to several strong dividend-payers. Earning a share of a company’s profits sounds appealing. But it’s important to pick carefully.
Mining for FTSE 100 dividends
One FTSE 100 dividend-payer I’d consider is Rio Tinto (LSE:RIO). In its last financial year, it paid dividends that amounted to a yield of 6.1%. I like that it’s a consistent source of passive income. I calculate its average dividend yield over five years to be 5.5%.
In addition, analysts expect earnings to grow by 27% this year. I’m comfortable that Rio will be able to continue paying consistent dividends over the next few years at least.
It’s a good time to be buying this FTSE 100 mining giant, in my opinion. Demand for commodities could be supported by a global economic recovery following the pandemic. Furthermore, several countries, including the US, are planning to spend more on infrastructure.
That said, iron ore prices are approaching multi-year highs. Any decline over the coming years could affect Rio’s earnings and the level of dividend payout.
Persimmon (LSE:PSN) is one of my favourite FTSE 100 homebuilders. I would describe it as a quality growth and income stock. It demonstrates quality with a pleasing 21% return on capital. In addition, it offers an operating margin of nearly 24%.
Persimmon has committed to pay total dividends of £2.35 per share in 2021. At the current share price, this equates to a dividend yield of over 7%.
This sounds pretty appealing to me. A word of warning, however. To sustain this generous dividend, Persimmon will need to ensure it grows its earnings. If it can’t, then the dividend could be at risk of being cut.
I’m currently optimistic about the housebuilding sector. Government-led home-buying and stamp duty incentives should help to support house prices, but such incentives are always at risk of being withdrawn.
Overall though, I think Persimmon shares offer a good balance between passive income and growth. I’m happy to continue holding them in my Stocks and Shares ISA.
A riskier FTSE 100 income share
Evraz (LSE:EVR) is a metals and mining company that’s part of the FTSE 100. It predominantly manufactures steel and iron ore. Most of its earnings are derived from Russia, Asia, and North America.
I would consider Evraz for a position in the passive income portion of my portfolio for several reasons. Firstly, it offers a current dividend yield of 5.6% that’s forecast to grow to almost 8% this year.
Its share price recovered strongly from the height of the pandemic-induced market panic a year ago. At the time of writing, its one-year share price gain is 160%. Helped by a rebound in steel prices, Evraz delivered “solid operating and financial results”.
That said, the rapid rise in steel prices might not be sustained. The rise was mainly due to short supply as demand started to recover in the second half of 2020. Any weakness in global steel prices could have an impact on earnings, in my opinion. In turn, the forecasted dividend could be affected.
All things considered, I would still consider Evraz for a position as part of my diversified ISA portfolio.
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Harshil Patel owns shares in Persimmon. The Motley Fool UK has no position in any of the shares mentioned. 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.