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The FTSE 100 index of shares is hugely popular with passive income investors. Largely speaking, UK blue-chip shares have distinguished dividend records, underpinned by:
- Robust balance sheets.
- Diverse revenue streams that deliver resilient earnings.
- Competitive advantages that protect profits and dividends, even in downturns.
- Mature business models that prioritise dividends over capital investment.
The thing is, no dividend-paying share is without risk. Take Diageo, which cut the dividend in February following sales pressures. It had consistently grown the annual dividend for more than 25 years prior to this.
Want to know how to build a resilient second income with an ISA? That’s great, because I have a plan…
Dividends for growth
Dividends are a powerful tool for creating long-term wealth. By reinvesting these cash rewards, investors can accelerate the compounding process, leading to incredible portfolio growth.
The bigger the ISA, the larger the passive income that can be generated in retirement. I’ll show you how.
Let’s say you’re putting £300 in a Stocks and Shares ISA each month. With this, you build a shares portfolio with an average 4% dividend yield. If you spent rather than reinvested your dividends, after 25 years you’d have an ISA worth roughly £178,000, based on a total average return of 9%.
But what about if you instead reinvested these dividends to grow the portfolio? Now we’re talking. With this included, you’d have an ISA worth around £351,000. That would then deliver an £28,000 yearly income if invested in 8%-yielding stocks.
Which FTSE 100 shares to buy?
As I say, dividends are never guaranteed. But here’s the thing: buying a wide selection of dividend-paying shares can deliver an extremely reliable income stream over time.
Here’s an example of what a well-diversified portfolio might look like:
| FTSE 100 stock | Years of unbroken dividend growth | Forward dividend yield |
|---|---|---|
| Sage | 35 | 2.7% |
| ICG | 16 | 4.6% |
| Standard Life | 10 | 7.6% |
| Alliance Witan | 59 | 2.2% |
| M&G (LSE:MNG) | 6 | 6.9% |
| Segro | 12 | 4.9% |
| Spirax | 58 | 2.7% |
| Coca-Cola HBC | 13 | 2.6% |
| Severn Trent | 9 | 4.1% |
This collection has a decent record of dividend growth, ranging from six years to more than half a century. It has a healthy average dividend yield of 4.3%, beating that one we used in the earlier example. And importantly, it’s well diversified by sector and region, providing resilience across the economic cycle.
M&G’s a dividend share I’m looking at for my own portfolio. It has the shortest length of dividend growth among this grouping. But that’s not a negative thing — it simply reflects the fact it’s only been a standalone business since 2019.
Since then, annual dividends have grown every year, even during pandemic-hit 2020. The reason? Its capital-light operations and recurring fee-based income have supported robust cash generation.
M&G’s Solvency II capital ratio’s 242%, up from 223% a year ago. So even if an economic downturn impacts its share price, the company remains in good shape to keep paying a large and growing dividend. I think it’s one of the best FTSE income shares to consider right now.
The post 9 dividend-paying FTSE 100 shares to target a huge ISA retirement income! appeared first on The Motley Fool UK.
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More reading
- Some pros and cons of buying dividend shares for passive income
- How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?
- How much do you need in an ISA or SIPP to target a £997 monthly income?
- 7.3% and 6.1% yields! Should I buy these cheap FTSE 100 shares for passive income?
- How £500 unlocks £34.05 passive income with this 6.81% yielding stock
Royston Wild has positions in Coca-Cola Hbc Ag and Diageo Plc. The Motley Fool UK has recommended Diageo Plc, M&g Plc, Sage Group Plc, Segro Plc, and Spirax Group Plc. 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.
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