I’m always looking for passive income ideas. And the best ones are when my income streams are truly passive. Side hustles are great, but they mean I’d have to do extra work on evenings and weekends to earn my so-called passive income. Here’s where the FTSE 100 comes in. It’s a large-cap stock index in the UK with many dividend-paying companies to choose from. Dividends are my preferred way of generating real passive income because they keep rolling in without my input.
So, here are two dividend stocks in the FTSE 100 I’d buy today.
A top dividend stock
The first company I’d buy is Vodafone (LSE: VOD). It operates telecommunications infrastructure primarily in Europe. I consider this a defensive sector as communication networks are vital today, even during recessions.
The dividend yield is what first attracted me to Vodafone though. In fact, the current forward dividend yield is almost 6.5% as I write today.
Generally, when I look for dividend stocks, the higher the yield on offer, the better. But I also have to keep in mind that dividends aren’t guaranteed. So, I also check to see if the company has been a regular dividend payer over the years. Vodafone looks good here too. Indeed, it’s paid a dividend for at least the past 10 years. The average dividend yield over this time has been 6.5%, which gives me confidence in the current forecast yield. It also means Vodafone was able to keep paying a dividend during the pandemic, again highlighting the defensive sector the company operates in.
I still have to keep in mind that Vodafone is carrying a lot of debt on its balance sheet. Net debt was €44.3bn at the end of the half-year period to 30 September. This may reduce the potential for dividend growth in the years ahead.
However, with its growing 5G capabilities and critical networking infrastructure, I’d buy Vodafone shares for their dividend yield today.
A FTSE 100 stock that’s fallen out of favour
The next stock I’d buy is British American Tobacco (LSE: BATS). I do view the sector as controversial given the health issues linked to its products. And the rise in environmental, social and governance (ESG) investing means many stock-pickers wouldn’t be interested. But I like its move into new-gen products. However, the company has also been the subject of a number of regulatory clampdowns in recent years. Therefore, it’s not been an easy stock to hold.
Having said that, I think the risks are priced into the shares today due to the forward price-to-earnings ratio being only 9. The dividend yield is also excellent, and will go a long way to help me generate a passive income. As I write this article, the current forecast is for a dividend yield of 7.2%.
British American Tobacco has also been able to pay a dividend for at least the last 10 years too. Again, this shows me that the company is a dependable dividend payer. The average yield over this time has been 4.8%, so still a highly respectable income stream for my portfolio.
Taking everything into account, I’d buy British American Tobacco shares today. It’s one of the biggest dividend payers in the FTSE 100. It’s not without risk though. But I view the shares as reasonably priced for the risks ahead.
Dan Appleby owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco and Vodafone. 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.
