I see FTSE 100-listed dividend shares as a brilliant way of generating passive income for my retirement, and I’ve been buying all I can afford lately. If my Stocks and Shares ISA was empty and I still had a full £20,000 contribution limit at my disposal, I’d consider spreading it equally between the following five top income-paying stocks.
If I could only buy one FTSE 100 dividend stock today, it would be insurer and asset manager Legal & General Group. That’s no idle claim, I bought its shares last year on three separate occasions. But L&G is still cheap trading at just 6.5 times earnings and yielding 7.75%.
I’d buy all these today
The share price fell 1.78% over the last 12 months, but I think it could recover once interest rates start falling and stock markets get their mojo back. Dividends are never guaranteed but L&G’s looks solid, while operating profit jumped 12% to £2.5bn last year.
I’d balance that by investing in the utility sector via one of the safest FTSE 100 stocks of all, utility National Grid. Its regulated earnings offer security while the 5.16% yield will look even better once interest rates start to slide. It’s not particularly cheap trading at 16.8 times earnings, but it never is.
Mining giant Rio Tinto endured a tough 2023, its shares falling 11.02% over 12 months. The troubled Chinese economy was largely to blame, as this hit demand for metals and minerals. I’m not expecting a sudden recovery either. However, with Rio trading at just 8.5 times earnings the potential for price falls is hopefully limited, while its 7.19% yield tempts (it’s forecast to dip to 6.2%, but that’s still pretty good).
I’d aim to hold Rio Tinto and my other picks for a minimum of five years, and preferably much longer, to give them time to fulfil their potential. Plus I’ll reinvest all my dividends for growth.
Getting the right balance
So far I have an insurer, a utility and a miner. So what about a housebuilder? In this case I’d go straight to Taylor Wimpey, which is currently the best performer in my self-invested personal pension (SIPP). It’s up 33.4% over the last 12 months. Most of the action has arrived since October, as mortgage rates fell and house price crash fears receded.
Markets may have got carried away with interest rate expectations, and Taylor Wimpey could surrender some recent gains. However, it’s still cheap today at 7.64 times earnings and yields 6.49%.
The last of my fabulous five dividend income stocks is private equity specialist Intermediate Capital Group, whose shares jumped 25% last year. The yield is slightly lower than my other picks at 4.84% while the valuation is 16.13 times earnings. However, it does have strong long-term share price growth potential, although nothing is guaranteed.
Together, my five stock picks would generate an average yield of 6.29%. That would give me income of £1,258 in the first year of a £20,000 ISA. With luck, this income stream should rise over time, as companies increase their profits and dividends. Only time will tell but I’d spread my risk by purchasing more dividend shares inside next year’s Stocks and Shares ISA allowance too.
