We’re surrounded by rising prices, with food, energy and housing all generally costing more than last year. That’s why I’m looking to boost my income. And one of my favoured methods is by investing in FTSE 100 shares.
There are three main ways to make money from the Footsie. First, if the share price rises, the value of my investment would grow.
Second, a company can buy back its own shares. These share buybacks are often overlooked, but as they reduce the number of shares in circulation, it can often lead to higher share prices.
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And third, companies can distribute cash to shareholders, in the form of dividends.
FTSE 100 dividends
Today, I’m focusing on the latter. The FTSE 100 is home to many dividend shares. On average, this large-cap index has a dividend yield of around 4%.
But some shares pay much more. For instance, housebuilder Persimmon has the largest dividend yield, currently at a whopping 18%. That’s enough to earn £540 in dividends a year if I invested £3,000 in this one stock.
That said, this Footsie share is an outlier. The prospect of a weaker housing market has dented the price of shares like Persimmon. That could be artificially raising its dividend yield. It also means it might not be sustainable.
Instead, I’d look for more reliable and stable dividends. And I’d focus on yields of around 6%-10%.
Factors to consider
It’s not enough just to look at dividend yields, in my opinion. There are several other factors that I’d consider before picking the best FTSE 100 shares for my Stocks and Shares ISA.
Companies tend to pay dividends from current earnings. In fact, I’d steer well clear of any that borrow money to fund dividend payments.
I’d look for dividend cover of at least 1.2, but the higher the better. This metric shows how many times a company can pay dividends from its earnings. A figure less than one would suggest that it can’t.
I also like to see stability and a long track record of making payments to shareholders. Plenty of FTSE 100 shares are mature and well-established. That has resulted in some having more than a decade of dividend history.
In addition, some shares have even managed to grow their payments over time. Bonus!
Diversification
As the risks of a global recession climb, I feel diversifying my shares is ever more important.
I want to avoid putting all my eggs in one basket. And by picking shares from several sectors, I should be better protected if one industry suffers more than the rest.
If I had a £3,000 investment right now to boost my income, I’d split my funds between five of my favoured shares.
Currently, I’d buy Rio Tinto, Taylor Wimpey, Phoenix Group, Imperial Brands and SSE. These shares operate in five distinct sectors. I’d say they broadly meet my criteria too.
On average, they offer an 8% yield, dividend cover of 1.7 times, and 18 years of consecutive dividend history. That sounds appealing to me.
