Dividend shares can be an excellent source of additional income. And the UK’s leading stock index, the FTSE 100, holds dozens of them.
In my own Stocks and Shares ISA, I own a mix of growth and income shares. These two groups tend to operate with widely different characteristics.
For instance, growth shares offer the potential to own a larger business in the future. One that exhibits growing sales and profits.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
By contrast, income shares tend to be more established businesses that offer greater dividend yields.
FTSE 100 yields
Right now, on average, the FTSE 100 has a 3.6% dividend yield. But my favoured top picks offer much more.
Yields currently go as high as 10%, but a word of warning. Yields this large might not be sustainable. Dividends aren’t guaranteed and they can be cut or suspended if management decides to do that.
That’s why it’s important to consider business quality and only favour those that offer stable businesses.
My top picks
If I had spare cash to devote to this strategy, I’d buy Phoenix Group, Legal & General and Barratt Developments.
Not only are these stable, established businesses, but on average they offer an 8% dividend yield. That’s enough to earn an extra £4,000 a year on a £50,000 investment.
In addition, these FTSE 100 high-yielders also offer the potential to grow my capital over time.
Cheap stocks
I haven’t just picked these three for their juicy dividends. These shares also look cheap to me. With an average price-to-earnings ratio of just 8.6, they seem cheap enough to provide a margin of safety. Veteran investor Warren Buffett is a staunch believer in this concept.
Essentially it boils down to the difference between the amount that’s paid for a stock and what its assets are worth.
It’s a bit like having a safety cushion.
Another reason I’ve picked these three shares is that they operate in different sectors. That offers some diversification benefits and avoids putting all my eggs in one basket.
An opportunity?
This week, banking concerns in the US are helping to weaken UK share prices. That could represent an opportunity to pick up high-yielding shares at a discount.
Now, these shares aren’t for short-term investing, in my opinion. Dividends are typically paid every quarter so it will take some time to earn them all.
That said, as a long-term investor, the daily gyrations of the stock market shouldn’t affect my income strategy.
Reliable income
FTSE 100 dividends have a solid reputation over the long run too. Many of the best dividend shares have a policy of consistently distributing profits to shareholders.
And these companies try to stick with it. For instance, some Footsie shares have been consistently paying dividends for decades. That includes during the 2008 financial crisis and 2020 pandemic.
This is the kind of resilience I’d be looking for to build a reliable second income from shares.
