Dividend stocks in the top-tier FTSE 100 index pay some of the most generous rates of passive income in the world. The US struggles to keep up.
While the S&P 500 now yields a modest 1.19%, the UK’s blue-chip index pays average income of 3.58%. Some individual stocks offer much more than that.
Wise Stocks and Shares ISA investors will want to build a balanced portfolio that contains both growth stocks and income stocks. That done, they may wish to ramp up their income from this year’s £20,000 ISA allowance.
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The FTSE 100 is full of fab income shares
After running through a list of top FTSE 100 shares, two jumped out at me. Both are solid, reliable companies with strong balance sheets. Both offer supersized yields. And both look good value after a disappointing run.
I actually hold the first of them – housebuilder Taylor Wimpey (LSE: TW). When I bought its shares last year, I decided they looked like a screaming buy. They had a price-to-earnings (P/E) ratio of less than seven, roughly half the FTSE 100 average of 15 times, while yielding north of 7%.
Taylor Wimpey has a solid balance sheet and I thought its shares would spring into life once interest rates fell and the housing market picked up. But after a bright start my holding has gone backwards.
The share price has plunged 9.53% over 12 months as interest rates look set to stay higher for longer while the UK economy risks another recession.
I already have a large holding, so I won’t take advantage of the dip. But I can see plenty of reasons why an investor would consider it, given today’s modest P/E of 12.56 and juicy 7.86% trailing yield. They should take a long-term view though, because the UK economy may struggle for a while yet.
An ISA investor may also want to look more closely at another high-income stock on its uppers, mining giant Rio Tinto (LSE: RIO). Its shares are down 10.81% this year but yield a tempting 7.01%. It’s cheaper than Taylor Wimpey, with a P/E of 8.53 times.
The share price is even cheaper
So what went wrong with the Rio Tinto share price? I’ll answer that in one word — China. The slowdown in the world’s second biggest economy has cast a shadow over commodity stocks, as demand from their single biggest customer slumps.
I don’t hold Rio Tinto but I do hold Glencore, and it’s also down in the dumps. What they both need is a resurgent China. I’m not convinced they’ll get it though, as stimulus packages repeatedly fall short.
Yet that low valuation and high yield makes Rio Tinto look very tempting again with a long-term view. If an investor split their £20,000 ISA equally between the stocks, they’d get an average deal of 7.44%. That would give an income of £1,488 a year.
With luck, that income will rise over time, as the companies get moving and reward loyal investors by hiking their dividends. In time, their shares may recover and potentially generate some capital growth on top.
