I reckon buying shares in FTSE 100 blue-chip companies and holding them for decades, topping up a bit whenever you have spare cash, is a brilliant approach.
I frequently think about a simple beginners’ no-brainer strategy, which starts by listing the FTSE 100 in order of forecast dividend yield. Pick from the top down, skipping any duplicate sectors, and keep going until you have however many you want.
Top dividends
It depends on which forecasts you use, but this is the top 10 I get:
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| Company | Sector* | Dividend | P/E |
| Taylor Wimpey | Home construction | 11.4% | 6.3 |
| BHP Billiton | Mining | 9.7% | 10.4 |
| Centrica | Utilities | 8.6% | 10.8 |
| Imperial Brands | Tobacco | 8.5% | 8.5 |
| Standard Life Aberdeen | Asset management | 8.4% | 10.7 |
| Vodafone | Telecommunications | 7.9% | 19.8 |
| Royal Mail Group | Delivery | 7.7% | 11.8 |
| Aviva | Insurance | 7.5% | 7.0 |
| Royal Dutch Shell | Oil & Gas | 6.0% | 11.7 |
| HSBC Holdings | Banking | 6.0% | 11.8 |
| Average | 8.2% | 10.9 |
(*Not strict FTSE-named sectors as there are some distinctions that I don’t think make sense for us)
My first thought is that I don’t like Vodafone shares on such a strange valuation, especially as the forecast dividends are nowhere near covered by earnings — but this is just a simple start. You might also think there’s a bit of risk there with the housing sector under investor pressure, and we have a cyclical mining stock included too.
The list also skips some reliable dividend stocks that you might prefer. For example, I might go for SSE over Centrica. And you might not want Aviva and Standard Life Aberdeen together as their businesses are close.
Market cap
Another favourite simple approach is to just list the FTSE 100 in order of market capitalisation. Again, pick from the top and skip duplicated sectors. That gives this top 10:
| Company | Sector | Dividend | P/E |
| Royal Dutch Shell | Oil & Gas | 6.0% | 11.7 |
| HSBC Holdings | Banking | 6.0% | 11.8 |
| Unilever | Personal goods | 3.1% | 20.8 |
| BHP Billiton | Mining | 9.7% | 10.4 |
| GlaxoSmithKline | Pharmaceuticals | 4.9% | 14.2 |
| Diageo | Beverages | 5.0% | 22.6 |
| British American Tobacco | Tobacco | 8.5% | 8.5 |
| Vodafone | Telecommunications | 7.9% | 19.8 |
| Prudential | Insurance | 3.3% | 10.2 |
| Carnival | Travel & Leisure | 4.1% | 10.6 |
| Average | 5.8% | 14.1 |
This time I think we’ve got a less volatile selection, and though the average dividend yield is lower, it’s still attractive at 5.8%. We’ve also missed out some stocks that I like. I’d seriously consider AstraZeneca, for example, as an alternative to GlaxoSmithKline, even with its dividends as low as 3.5%.
Just a start
Of these lists, I’d go for the high-yield one. But I’d temper it by leaving out individual companies I really don’t fancy — and I’d be tempted to replace them from the table of big market caps. An obvious switch to me would be to swap out Vodafone from the dividend list and go for GlaxoSmithKline from the market cap list.
I’d also probably replace HSBC with Lloyds Banking Group, as the latter has better dividend growth on the cards, better cover by earnings, and I think it’s super cheap on a P/E of seven. And I already own Lloyds shares.
Improvements
That hints at ways a simple start like this can be refined. We could, say, add a minimum dividend cover to our requirements, filter for dividend yields over, say, the Footsie’s current average of 4.5%, and then sort the list in market cap order. And we can try the same thing with other indexes like the FTSE 250.
I try variations like this all the time, so watch this space.
