Dividend stocks are ones that pay out income to shareholders. As an income investor, it’s one of my primary investing goals to maximize the potential yield. Even though I’m based in the UK, I’m free to invest in companies outside of the traditional FTSE 100. So this got me thinking. What if I bought US-based dividend stocks, in order to try and generate more passive income than from their UK counterparts?
Measuring the dividend potential
Simply measuring a stock by the dividend paid out per share isn’t the best metric to use. For example, I could get paid 10p per share in income from two different dividend stocks. One has a share price of 100p, the other has a share price of 1,000p.
From this point of view, I’d prefer to receive the 10p per share from the company with a lower share price. This is because the dividend is a larger proportion of the share price. So in terms of how much I have to spend to buy into the firm and access the dividend, it’s much more attractive.
The technical name for this example is the dividend yield. This is the metric with which I’ll compare US stocks to UK stocks. It’s still not a perfect comparison as dividends change. The share price also changes every day. But as the perfect solution doesn’t exist, it’s the best fit for the job.
Better dividend stocks across the pond?
I’m going to compare the FTSE 100 with the S&P 500 index. First up, let’s look at the average dividend yield across the whole index. For the FTSE 100 it’s 3% and for the S&P 500 it’s 1.69%. Clearly, the UK wins on this front. So if I didn’t want to specifically target a particular dividend stock, then the UK would offer me a higher dividend yield as a total index.
If I wanted to target the company offering me the highest yield, again the UK comes out on top. The highest yield currently available in the S&P is 7.58%, whereas in the FTSE 100 it’s 8.14%. Admittedly, there isn’t a huge difference here, so both countries are viable options for me.
An interesting comparison is looking at the number of companies that are currently paying out dividends. For the S&P 500, 116 firms aren’t paying dividends at the moment. So around 75% of the index are.
For the FTSE 100, there are 14 not paying out income, so 86% of the index are dividend stocks. I can see that the S&P 500 index has many more stocks in it, so this might be an influencing factor in the lower figure.
Overall, it’s clear to me that the FTSE 100 is still the favoured market for income investors like myself. Based on various different points of view, I think that dividend stocks in the UK offer me the best chance to maximize passive income potential.
