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If I didn't have savings at 40 (or any other age), I'd get to work buying a couple of big-ticket items. FTSE 100 dividend stocks.
The top-line index is packed with them right now. Many are cheap and offer very high returns. Dividend stocks will generally never turn out the lights. Instead, they offer a combination of income and long-term growth, which compounds over the years.
I would buy them into a stocks and Shares ISA as this allows me to get all my dividend income and share price growth tax free for life.
Hunting for income
If I didn't own dividend stocks, I'd probably start with the FTSE 100 insurer. Aviva (LSE:AV). It is a strong, diversified financial services business offering a range of insurance, wealth management and retirement products with 18 million customers.
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As people realize that the state pension will not provide them with a comfortable retirement, more and more people are saving on their own. Companies like Aviva will benefit.
It's a solid, old-school business whose share price has been oscillating for some time. However, its shares are up 19.9% in a year, compared to growth of just 2.19% across the FTSE 100 as a whole.
My concern is that CEO Amanda Blanc will struggle to drive growth. She has done a good job of streamlining her expanding operations, but building market share and increasing profits is never easy in a mature market. She would rather have bought it before the recent share price jump than after, as there is a risk of her pulling back.
Until recently, Aviva was trading dirt cheap at around seven times earnings. Today it is more expensive, 13.14 times, but not expensive. The residual yield remains attractive, at 6.81% per year, which destroys any savings account. Dividends are never guaranteed and coverage is thin: 1.1 times earnings. I would still buy it, with the goal of holding it for years and reinvesting each dividend to generate growth.
Another great producer
For diversification purposes, I would choose my next FTSE 100 dividend shares from a different sector and buy a multinational electricity and gas utility company. National Network (LSE: NG). This is arguably one of the strongest dividend income stocks of all, as payouts to shareholders are funded by government-regulated earnings.
Currently, the stock yields 5.37% annually. That's lower than Aviva, but it still beats the best buy cash accounts and should hopefully rise slowly but steadily over time.
National Grid is slightly more expensive than Aviva and trades at 16.85 times earnings. Investors are willing to pay a premium price for the security it offers. That said, National Grid's share price has fallen 8% in the last year. This is quite rare and I would view it as an opportunity to purchase it at a discounted price.
Even a relatively safe action carries risks. National Grid has to invest billions in energy infrastructure and costs can easily be overrun. It had net debt of £46.2bn and this is forecast to rise slightly in 2025. If the shares fall, capital losses could wipe out gains from dividend income.
I would combine National Grid with Aviva and then look for more high yield dividend stocks to spread my risk and absorb the rest of my ISA allocation. There are many more out there.
