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Forget buy-to-let! I’d buy these 2 FTSE 100 dividend stocks today for a passive income

Rupert Hargreaves
Happy diverse people together in the park

Buy-to-let has been a popular investment over the past few decades, and the asset class has made a lot of property owners very wealthy. However, recent tax changes and regulations mean that it has become harder to earn a passive income from rental property.

Many FTSE 100 companies now have better income prospects. As such, owning blue-chip stocks could be a better way to generate a passive income over the long run. Here are two prime examples that could be worth purchasing today.

Royal Bank of Scotland Group

Recent updates from RBS (LSE: RBS) show just how far the business has come over the past 10 years. Management has spent the last decade selling off non-core businesses and repositioning the bank for growth.

These efforts have also freed up capital and improved profit margins so much that RBS was able to reintroduce its dividend in 2018, and it paid out a special dividend to shareholders last year.

Despite the company’s improving income credentials, RBS’s exposure to the UK economy has weighed on its share price over the past three years. This presents a buying opportunity for long-term investors.

RBS currently trades on a price-to-earnings (P/E) ratio of 10.5, which suggests that it offers a wide margin of safety. Moreover, the stock is set to pay out a total dividend yield of 9.4% for its 2019 fiscal year, and 6.2% for 2020. The payout is covered 1.5 times by earnings, which opens up the prospect of further special dividends down the line.

With its market-beating dividend yield, RBS appears to offer an excellent opportunity for income investors with a long-term outlook. It should appeal to those who are looking for a growing income stream without having the hassle that investments like the buy-to-let property market bring with them.

Phoenix Group Holdings

Another FTSE 100 stock that offers a highly attractive passive income stream is Phoenix Group Holdings (LSE: PHNX). It seems that investors are avoiding this business because it is quite complex to understand.

Phoenix buys old life insurance policies and then manages them to extract as much value as possible. By operating at scale, the company can achieve economies of scale other insurers cannot, which means that it can extract more profit from these policies as they run off.

Over the past few years, Phoenix has been on an acquisition spree as other insurers have sought to offload their life insurance assets as part of their efforts to reduce business complexity. The company has been more than happy to take on the risks of managing these policies as this is its sole line of business.

The company offers a dividend yield of 6.3% at present, and the payout has been growing in line with its book of policies for the past five years. This dividend yield suggests that the stock offers value at current levels. The rest of the FTSE 100 supports a dividend yield of 4.3%. Therefore, now could be the time to buy this income champion based on its attractive income stream.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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