What’s the best way to generate a cash income? With best-buy cash ISA interest rates hovering around 1%, you’d need a pot of £2m to generate an annual income of around £20k. To generate the same income from a portfolio of dividend stocks yielding 5%, you’d only need £400k.
Of course, dividends aren’t guaranteed, as this year’s events have shown. But many companies have maintained their payouts or have already restarted dividend payments. Today I want to look at three FTSE 100 dividend stocks I’d buy for a regular income.
Long-term growth from healthcare
There aren’t many certainties in the world. But I think we can be sure that demand for modern healthcare will continue to grow for the foreseeable future. My main healthcare investment is GlaxoSmithKline (LSE: GSK), the FTSE 100 pharmaceutical and consumer health group.
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Glaxo is a popular dividend stock, but in recent years performance has been held back by the declining sales of former blockbusters that have lost patent protection. One big example of this is asthma medicine Advair. More recently, vaccine sales have fallen as the Covid-19 pandemic has restricted non-emergency healthcare activity.
However, I expect the headwinds from the pandemic will soon start to reverse. Looking further ahead, GSK has a number of new products that should support medium-term growth. I also expect the planned separation of the group’s consumer business (which owns brands such as Sensodyne) to improve performance.
At current levels, Glaxo stock offers a dividend yield of 5.2%. I see this as a good level to buy for long-term investors.
A family-focused dividend stock
FTSE 100 asset manager Schroders (LSE: SDR) (LSE: SDRC) — which manages more than $500bn of investor assets — might not seem like a family firm. But Schroders’ founding family still has a controlling stake in this 216-year old firm.
I think this family ownership is reflected in the conservative, long-term strategy employed by the group.
For income investors, investing in family firms can make sense. The firm’s controlling shareholders won’t want to lose what might be their main source of income. In my experience, dividends paid by family firms are often more affordable and sustainable than at comparable firms with no long-term ownership.
I see Schroders as one of the best dividend stocks in the FTSE 100. The shareholder payout hasn’t been cut for more than 30 years. And if you buy the non-voting Schroders (LSE: SDRC) class of shares today, you can look forward to a 5.4% dividend yield.
A sinful 8% dividend yield
Tobacco stocks divide opinion like few others. But the reality is that in financial terms, selling cigarettes is still a very large and profitable business. As I write, FTSE 100 stock British American Tobacco (LSE: BATS) offers a well-supported dividend yield of 8.5%.
There are very few other companies that can offer such strong cash flows for shareholder returns. But tobacco stocks are out of favour at the moment. That’s left BATS trading on a modest valuation of around eight times earnings.
Owning this dividend stock isn’t without risk. Regulations on tobacco sales could change in the future. The decline in smoking rates could accelerate. And BATS’ large debt pile could cause problems for the firm.
However, I suspect that industry leaders like this one will be able to manage these problems and continue to reward shareholders. I rate the stock as a dividend buy.
