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Have £5k to invest? Here are 2 FTSE 100 dividend stocks I’d buy to build a passive income

Peter Stephens
Hand holding pound notes

Obtaining a generous and growing income has been relatively challenging in the last decade. Low interest rates have meant that the returns on cash and bonds have been limited.

With interest rates expected to continue to be low in the coming years, buying FTSE 100 shares could be a worthwhile means of obtaining a growing passive income.

Here are two large-cap shares that could offer impressive dividend outlooks. Their valuations and growth potential suggest that now could be the right time to buy them.


Recent updates from Barratt (LSE: BDEV) have shown that the housebuilder is enjoying resilient demand for its properties. This may seem counterintuitive, since there is a significant amount of uncertainty surrounding the UK’s economic outlook. However, a lack of supply of new homes and government policies such as Help to Buy are aiding the performance of the wider sector.

Barratt currently has a dividend yield of around 6%. Although this includes a special dividend, the prospects for it to be paid over the coming years appear to be relatively bright. The company could continue to experience robust demand for its new-build properties, while its solid financial position may provide the means of delivering a rising dividend to its investors.

With the company’s shares currently trading on a price-to-earnings (P/E) ratio of around 11, they seem to offer good value for money. Certainly, there is scope for a degree of change in the wider economy that could affect the performance of the housing industry. However, with a high yield and strong track record of growth, the stock could offer income investing appeal in the long run.


Another FTSE 100 share that could be impacted by the performance of the UK economy is Tesco (LSE: TSCO). Its recent updates have shown that it has continued to deliver improving products and customer services. They have boosted its customer satisfaction ratings, which may improve its overall competitive advantage in what is a crowded supermarket sector.

Although Tesco’s CEO, Dave Lewis, will leave the company in 2020, the business seems to have a sound growth strategy. It centres on using technology to improve efficiency, while seeking to build on the company’s loyalty programme through a variety of new features. They could help to differentiate the retailer from its sector peers, and provide a more loyal customer base.

With Tesco’s shares currently yielding just 3.2%, there are higher-yielding opportunities within the FTSE 100. However, its dividend payout is covered twice by profit. This suggests that it could rise at a fast pace over the coming years – especially with the company’s bottom line being forecast to increase by 9% in the next financial year. As such, now could be the right time to buy a slice of the retailer as its income potential improves.

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Peter Stephens owns shares of Barratt Developments and Tesco. The Motley Fool UK has recommended Tesco. 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.

Motley Fool UK 2019