10 FTSE 100 income ideas for ISA investors

by Ben Hobson from Stockopedia |

For more predictable returns, Stockopedia's Ben Hobson picks these high-yielding blue-chip shares. 

With the end of the tax year just a couple of weeks away, it's time for British savers and investors to think about where to deploy new tax-sheltered funds. 

Under the rules, most of us can allocate up to £20,000 to an Individual Savings Accounts in the coming tax year. With cash rates still low, putting that money to work will be a priority for many. But where?

While these decisions come down to personal circumstances (and professional advice is recommended), one option for those comfortable with equities is to look at some of the dividends on offer from FTSE 100 companies.

UK stocks paid out a staggering £100 billion in dividends last year, and the bulk of that cash came from the biggest and best-known companies in the FTSE 100.

Given the volatile market conditions - particularly late last year - those record-breaking payouts were more important than ever. They were proof that solid, high yielding dividend stocks can be a strong source of investment profits in both good times and bad.

These kinds of dependable returns are a major reason why high yielding FTSE 100 shares are so popular. And their long-term income streams - and the compounding effects of reinvested dividends - can make them ideal investments inside a tax-efficient ISA.

So how do you find them? Well, in this column we often explore strategies for finding blue chip dividends. Generally they all share some basic rules that can help to put you on the right path to finding solid dividend stocks. So let's take a look...

Four rules for finding dividend shares

High (but not excessive) dividend yield - Yield is probably the most important dividend metrics. It tells you the percentage of how much a company pays out in dividends each year relative to its share price. So it's the default measure used to compare stocks.

High yields are obviously appealing, but caution is needed. When the market anticipates a dividend cut, the share price will fall, which actually pushes the yield higher - but this can be a trap. So it pays to be wary of excessive yields. Income investors will usually be shooting for better than the market average yield (which is about 3.8%). But they’ll be starting to get nervous with anything over 10%.

Safety in size - Part of the appeal of FTSE 100 dividend stocks is their financial strength. Large size and scale means that their vast cashflows tend to be predictable. It gives them the resilience to maintain their dividends through the economic cycle. And while large companies aren’t immune from making dividend cuts, their financial strength is an appealing safety factor for income investors.

Dividend growth - Another important marker for dividend hunters is a track record of payout growth. Progressive dividend growth can be a pointer to payout policies that are being handled carefully by management. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.

Dividend cover - Attractively high yields obviously turn heads - but it's important to know that a dividend is affordable. Dividend cover is a go-to measure of a company's net income over the dividend paid to shareholders. 

Cover is calculated as earnings per share divided by the dividend per share. It helps to indicate how sustainable a dividend is. Dividend cover of less than 1-times suggests that the company may not be able to fund the payout from its current year earnings. So it may have to dip into reserves or even use debt to bridge the gap

With this in mind, here are the top 10 companies in the FTSE 100 that pass these four rules (sorted by yield). 

Name Mkt Cap £m Yield % Dividend increases over 10 years Dividend Cover Sector
Persimmon 7,320 10.2 3 1.2 Consumer Cyclicals
Centrica 7,004 9.5 4 1.2 Utilities
BHP 90,063 7.8 7 1 Basic Materials
Tui AG 4,852 7.7 5 1.7 Consumer Cyclicals
Imperial Brands 25,339 7.4 9 1.1 Consumer Defensives
Aviva 16,952 7 7 1.3 Financials
WPP 11,028 6.9 8 1.9 Consumer Cyclicals
BT 22,624 6.7 8 17 Telecoms
Phoenix 5,056 6.6 6 1.1 Financials
Barratt Developments 6,224 6.4 5 1.7 Consumer Cyclicals

Source: Stockopedia

The prices of stocks like Centrica (LSE:CNA), TUI (LSE:TUI), Aviva (LSE:AV.) and WPP (LSE:WPP) have come under pressure in the past year. But, while the market may have lost some love for them, the underlying strength of large-cap stocks is a reason why income investors are often happy to pick up these kinds of shares on high yields. Meanwhile, others such as turnaround plays like Phoenix (LSE:PHNX) and cyclical groups like the housebuilder's Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) and the miner BHP (LSE:BHP), have done much better.  

So for investors considering their options in the new ISA tax year, one source of potentially more predictable returns could be the high yielding dividend stocks of the FTSE 100. The index is home to some of the most reliable dividend-paying stalwarts you can find. Their international exposure and financial strength could offer some much-needed comfort in an otherwise uncertain political and economic climate. 

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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