Why I think FTSE 100 dividend shares could build a better second income than the S&P 500
A second income’s a dream I’ve been building towards for several years. It’s not just a desire, it’s a necessity — if I hope to achieve my goal of early retirement.
In recent years, my friends and colleagues have espoused the spectacular potential of US tech stocks on the S&P 500. Sure, they enjoy periods of rapid growth and many smart (and lucky) investors have secured decent returns. But for those with a long-term outlook — who aren’t trying to time the market — I find FTSE 100 dividend stocks more preferable.
Assessing longevity
When I try to assess where Tesla or Nvidia will be in 20 years, it’s difficult to be certain. They’re both relatively young companies that have enjoyed spectacular success in a short space of time. But both rely on niche markets that, while in high demand now, don’t have a proven future. Not to mention the fierce competition they face!
Comparatively, the UK’s home to a wealth of companies boasting many decades of reliable performance. While the FTSE 100 only began in 1984, some of its constituents — such as Pearson and Diageo — are over 150 years old. Phoenix Group, Rolls-Royce, Shell and Barclays are all over 100 years old.
In fact, there are no less than 37 companies on the list that are over a century old.
Why dividends matter
Obviously, age alone doesn’t make a company a good investment choice. If it’s failed to expand and grow in that time, something may be lacking. One good way to assess this is through dividend growth — consistently profitable businesses tend to increase their dividends every year without fail.
Bunzl, for example, has been increasing dividends for over 30 years. However, it tends to have quite a low yield. British American Tobacco has a high yield and has been increasing dividends for almost 30 years. But the future of the tobacco industry is uncertain.
Finding a balance
Rather, investors may want to consider Irish business services company DCC (LSE: DCC). The 49-year-old business has a decent 4.7% yield and has been growing dividends for 25 consecutive years. It’s core focus is on investing in the energy sector.
Despite a 10% revenue drop in 2024, it still managed to increase its adjusted operating profit by 4.1%. It also increased dividends by 5% to 196.6p per share. Overall, dividends have grown at a rate of 9.6% a year for the past decade.
However, there are some risks due to the company’s exposure to fossil fuels. Recently, it announced plans to divest its Healthcare and Technology divisions to focus purely on the Energy business. The aim is to simplify operations and enhance shareholder returns.
However, energy’s an inherently risky industry, currently facing notable headwinds. Although it’s pushing more towards green energy and renewables, it could take some time before this strategy turns a profit.
Still, with solid financials and an excellent dividend track record, I like its long-term prospects. It’s the kind of reliable business that could be a good addition to consider for a passive income portfolio.
The post Why I think FTSE 100 dividend shares could build a better second income than the S&P 500 appeared first on The Motley Fool UK.
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Mark Hartley has positions in British American Tobacco P.l.c., Diageo Plc, and Phoenix Group Plc. The Motley Fool UK has recommended Barclays Plc, British American Tobacco P.l.c., Bunzl Plc, Diageo Plc, Nvidia, Pearson Plc, Rolls-Royce Plc, and Tesla. 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.
