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Building a second income? Here are 2 FTSE 100 dividend stocks I’d buy and hold today

Rachael FitzGerald-Finch
A person holding onto a fan of twenty pound notes

A regular passive income from FTSE 100 stocks is a notable way of growing your wealth. Building a portfolio of high dividend shares creates a regular second income at a much higher annual rate than bank investments.

The current ultra-low interest rate environment means the gains you make from holding dividend stocks are greater than ever before. But, many FTSE 100 companies are suspending or cancelling dividends because of coronavirus-induced reductions in revenues.

With this in mind, I’ve found two top FTSE 100 companies still paying great dividend income.

BP dividend

The current BP (LSE: BP) share price of 341p provides for a dividend yield of 10.5%. The oil major has so far shown no sign of cutting its dividend, unlike rival Shell. But, even if it does, the market has been speculating on a cut long enough for it to be already accounted for in the share price.

In addition, oil prices appear to be stabilising. Brent crude is now above $40 a barrel for the first time in nearly three months on the belief the world is beginning to emerge from lockdown. Oil stockpiles are falling and OPEC+ are close to agreeing a short extension on supply cuts. This is good news for BP’s 20% stake in Russian state oil producer Rosneft.

The BP share price, trading at a current price-to-earnings (P/E) ratio of 19.7, is slightly above the industry average of around 16. However, the company boasts a solid credit rating and the financial flexibility to help with these tough times. In addition, BP is aiming for a breakeven point of $35 per barrel during 2021, helping with profitability. The market clearly expects more from the oil major than from other oil firms.

A FTSE 100 stalwart

FTSE 100 stalwart Imperial Brands (LSE: IMP) has also kept its dividend. However, Imperial has rebased its policy, so payouts may vary depending on profitability. Usually, this means a dividend cut but in Imperial’s case, its earnings are reliable meaning its profits should be too.

In any case, boasting a dividend yield of 13%, even after a hypothetical 50% cut, Imperial remains a top FTSE 100 dividend payer. And if that’s not enough, the tobacco firm maintains plans to return excess cash to shareholders via share buybacks.

Moreover, Imperial is a cash-conversion machine. In 2019, it converted 95% of its operating profits into cash. Its business has stayed strong throughout the coronavirus pandemic which encourages high-profit expectations for the rest of the year. 

Both these FTSE 100 firms boast strong fundamentals and good dividend growth history, Imperial in particular. Financial markets appear bullish about the prospects of both. Indeed, Imperial currently trades on a P/E of 16.5, about average for the industry.

Despite this, both companies offer good rates of return, especially when compared with the rest of the index. Reinvesting these dividends and compounding the return is definitely the best way to build a second income.

I think Imperial and BP offer two of the best opportunities for passive income on the FTSE 100 right now. I’d buy and hold both today.

The post Building a second income? Here are 2 FTSE 100 dividend stocks I’d buy and hold today appeared first on The Motley Fool UK.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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 2020