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Time to abandon the FTSE 100 and look elsewhere for dividend stocks?

Middle-aged Caucasian woman deep in thought while looking out of the window
Image source: Getty Images

The FTSE 100 has been a decades-long destination for investors seeking a large, growing, and reliable passive income. But in the post-pandemic climate, many of the index’s dividend stocks have failed to live up to their previous glories.

In fact, data just released by a major financial services provider suggests it could be time for dividend hunters to look elsewhere for dividend-paying shares.

The crown slips

Octopus Investments — a giant in the field of venture capital trust management — says FTSE 100 shares “continue to lag as a source of dividend growth” after the end of the Covid-19 crisis.

It notes that cash dividends from these blue-chip stocks remain 20% below pre-pandemic levels, adding that “there does not appear to be an imminent recovery on the horizon”.

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Octopus believes Footsie dividends will be 11% below pre-virus levels in 2025. This compares with growth of 5% for UK shares when the FTSE 100 is excluded.

As a result, the dividend yield on small- and mid-cap shares will surpass that of the FTSE for the first time in a decade in 2025, Octopus says. This can be seen in the table below:

2025 dividend yield

FTSE 100

4.26%

FTSE Small-Cap

4.53%

FTSE 250 (excluding information technology stocks)

4.46%

Higher yields aren’t the end of the story either. Dividend cover — which measures a company’s ability to deliver the dividends analysts are expecting — is also higher outside the Footsie. This, in turn, provides investors with improved peace of mind.

Octopus puts this at 2.31 times for FTSE 250 (excluding information technology) shares, 2.66 times for FTSE Small-Cap shares, and 3.67 times for FTSE AIM stocks.

All three outstrip coverage of 2.12 times for FTSE 100 businesses.

So what next?

Octopus’s forecasts provide plenty of food for thought. But I don’t think they mean investors should consider abandoning the Footsie altogether in the quest for passive income.

Many UK blue-chip companies still look set to pay large and dependable dividends that grow over time. A large number have qualities like market-leading positions, multiple revenue streams, and strong balance sheets that allow them to provide dividends year after year.

However, the Octopus report does illustrate the wisdom of casting a net far and wide when it comes to investing. Impact Healthcare REIT (LSE:IHR) is one top mid-cap stock that isn’t on the shopping list of most dividend investors. And I think it’s a top buy today.

A top dividend stock

This property stock operates a portfolio of residential care homes in the UK. Long leases guarantee it a steady income, regardless of economic conditions, while inflation-linked rent increases provide the foundation to grow earnings (and thus dividends) over time.

Its classification as a real estate investment trust (REIT) also means Impact must pay at least 90% of annual rental profits out in the form of dividends. For 2024 this translates to a gigantic 8.4% dividend yield.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

On the downside, the REIT’s share price may stay under pressure if interest rates remain at elevated levels. But on balance the outlook here is pretty robust, with the UK’s rapidly growing elderly population primed to boost demand for its services.

I believe building a balanced portfolio of FTSE 100 stocks and other shares (like Impact) is a great way to make long-term passive income.

The post Time to abandon the FTSE 100 and look elsewhere for dividend stocks? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares 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 2024