I’m on the lookout for blue-chip FTSE 100 stocks to provide a passive income stream. But I’m not just looking for any dividend stocks. I want to buy companies that have a strong track record of increasing payouts to investors, as well as a high level of dividend cover.
Passive income plays
Two companies immediately jump out. B&M European Value Retail and Johnson Matthey currently support dividend yields of 2.2% and 2.6% respectively. These are around half of the market average. Nevertheless, they are both well covered by earnings per share. The two organisations have a dividend cover ratio of nearly three. That suggests earnings could fall by 50% and the distributions would still be safe.
What’s more, B&M has upped its dividend to investors every year since 2015. The payout has increased at an average annual rate of 19%, rising from 3.4p to 11.2. That’s excluding any special dividends.
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Johnson Matthey cut its dividend in 2020, although analysts are expecting a quick recovery over the next two years. Before the cut, the company had increased its distribution to investors every year for seven consecutive years.
Based on these track records, I believe these two FTSE 100 businesses would make great additions to any passive income portfolio.
FTSE 100 yield
For a higher level of passive income, investors could buy GlaxoSmithKline. At the time of writing, this healthcare champion supports a dividend yield of 5.7%. The dividend cover has risen in recent years as earnings have increased. It currently stands at around 1.5, which is relatively low compared to the groups above, but still acceptable, in my opinion.
The company hasn’t increased its distribution for the past few years. Still, due to the defensive nature of the business and sustainability of the payout, I’m willing to overlook this lack of growth.
One sector that’s shown itself to be extremely resilient over the past 12 months is the supermarket sector. As a result, I believe this is one of the best places to look for income in the current environment.
Retailers such as Morrisons have benefited from an increase in demand for essential products, as well as the closure of hospitality businesses. Market research firm Kantar believes consumers spent a record £12bn in supermarkets in December.
Morrisons recently reported a near 9% year-on-year increase in sales over the festive period. This growth should underpin the company’s dividend for 2021. Analysts forecast a potential yield of 5% for 2021, which should be covered as much as 1.6 times by earnings per share.
Finally, I don’t think any passive income portfolio will be complete without some exposure to infrastructure. Infrastructure funds invest in assets such as bridges, buildings and roads. These assets have lifespans of decades and provide a steady stream of income in all environments.
3i is one of the largest infrastructure funds in the country. Its asset base has helped the company increase its payout to investors every year for the past six years. At the time of writing, the stock supports a dividend yield of 3.4%.
