There is one undeniable advantage to dividend stocks. And that is a sense of financial security or even financial freedom that can result from accumulating them. Many of these stocks may not have the fastest rising share price, but the passive income they can generate regularly for me is a pretty good deal too. And this income can be used however I like — either for spending or further saving, or a combination of both.
Dividend stocks for the medium term
At present, I see two great opportunities for dividend stocks. The first of these is for the medium term, which is to say, three to four years. With the economic recovery underway, I like FTSE 100 cyclical commodity stocks like miners. Fiscal stimulus has already had a big impact on industrial metals’ prices since last year. With even more public spending and improvement in growth expected over the next few years, these stocks can continue to do well.
They pay generous dividends too. For instance, the Russian miner and steel producer Evraz has a dividend yield of almost 13%, which is the highest among FTSE 100 stocks. Similarly, Rio Tinto also has a 9.5% yield. Moreover, the capital gains on these stocks have been huge in the past year. Typically an economic downturn is bad for such stocks, but Chinese public spending last year, to provide support during the pandemic, saved them from a slump.
However, I think active management of these stocks could be required over time. Since they are cyclical, both the capital gains and the dividend amounts could slow down as another downturn inevitably shows up. But for now, they are good investments.
FTSE 100 stocks for long-term passive income
For the long term, say 10 years or so, I like FTSE 100 utilities. The advantage to these stocks is dividend predictability. Consider last year. Even though stocks across sectors cut dividends last year, utilities were largely able to sustain them. This makes them dependable passive income generators even during bad times. Moreover companies like SSE and National Grid also have inflation-linked dividends. This means that their dividends rise at the rate of inflation every year, so that the real returns for investors stay constant.
Utilities also offer capital growth over time, even though this increase is not always comparable to say, miners in the past year. Their dividend yields are also lower, ranging between 3% and 5%. Still, I think the fact that they are relatively stable counts for something. I also like that they are financially healthy, which makes me confident about their ability to pay dividends.
Besides these there are plenty of other FTSE 100 stocks I like for dividends. Oil biggies are among these, which are seeing a return of good fortune as oil prices have picked up this year. Insurers is another category of potentially long-term healthy dividend providers.
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Manika Premsingh owns shares in Evraz and Rio Tinto. The Motley Fool UK has recommended National Grid. 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.