2 FTSE 100 stocks I’d buy today for a second income

These FTSE 100 (INDEXFTSE:UKX) stocks have some of the most secure-looking dividends in the whole blue-chip index, writes Rupert Hargreaves.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One of the biggest mistakes investors can make when trying to build a second income stream with dividend stocks is chasing yield. 

Buying stocks just because they have a high dividend yield can be a disastrous strategy because, more often than not, a dividend yield far above the market average is a sign that payout isn’t sustainable. If the distribution is cut, the resulting capital loss can eliminate years of dividend income.

With that in mind, I’m going to look at two FTSE 100 dividend stocks that might not have the highest yields around, but have some of the safest distributions in the index, in my opinion.

Impressive track record

The first company I’m going to profile is Bunzl (LSE: BNZL). This distributor is, without a doubt, one of my favourite FTSE 100 companies. Over the past few decades, the business has gone from strength to strength, expanding steadily through a combination of acquisitions and organic growth.

The company lives well within its means while reinvesting a substantial portion of profits back into the business to drive growth. Net profit has grown at a compound annual rate of just under 10% per annum for the past decade, and net debt has remained relatively constant as a percentage of shareholder equity. It has bounced between around 80% and 100% during the past five years.

That might seem like a lot of debt from an asset perspective, but because the business is relatively asset-light, the figures are somewhat misleading.

From a cash-flow perspective, Bunzl’s debt metrics are much less concerning. Last year, the company generated around £450m in free cash flow from operations compared to net debt of £1.4bn. These figures imply Bunzl could pay off all of its creditors in three years.

The dividend cost Bunzl £152m last year, which gives the company plenty of headroom to increase the distribution in the years ahead. And that’s why I think this stock could be an excellent investment if you’re looking to build a second income stream. At the time of writing, the shares support a dividend yield of 2.5%.

Market leader

The other dividend champion I think might be worth considering for an income portfolio is Croda (LSE: CRDA). This stock currently supports a dividend yield of just under 2%. But the payout is covered twice by earnings per share, which gives the company plenty of headroom to increase the distribution in the years ahead.

What’s more, Croda is one of the world’s leading producers of speciality chemicals, which tells me it’s unlikely to ever experience a sudden drop in earnings. Producing chemicals for products such as cosmetics is a specialist industry, where customers have to be sure their products are of the highest quality, so they don’t tend to change suppliers. 

Croda has been able to capitalise on this. Net profit is up around 35% in five years and earning should continue to grow steadily for the foreseeable future. These qualities tell me Croda could be an excellent investment for your second income stream portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »