I’m a bit of a belt-and-braces man with the level of readily accessible cash I like to hold to guard against unforeseen circumstances. However, there comes a point when simply adding to your cash pile undermines your ability to grow your long-term wealth.
This is particularly true at the moment, with the best easy access Cash ISA paying interest of just 1.44%. Even locking your cash away in a five-year fixed ISA, you’d do well to get 2%. No, for growing long-term wealth, I think investing in FTSE 100 dividend stocks is likely to be a far more rewarding strategy. Here are three candidates I’d be happy to buy today.
Diversified business Associated British Foods (LSE: LON:ABF) isn’t among the snappiest names in the FTSE 100, but its biggest business — Primark — will undoubtedly be familiar to everyone. As will many of the brands in the largest of its food businesses. These include Twinings, Ovaltine, Kingsmill and Allinson’s breads, and Jordans cereals. Its three other food businesses are ingredients, sugar and agri-foods. I like the group’s diversification, which is not only by business segment, but also geographical, with over 60% of revenue (and rising) coming from outside the UK.
At the current share price, you’ll have to pay 17.7 times this year’s forecast earnings. But I believe this somewhat premium rating is good value for such a high quality portfolio of assets. Meanwhile, the initial yield of 1.9% on the forecast dividend is a long way from being the highest around, but I expect it to rise strongly over the coming years.
Trusted partner I can’t envisage a day when tensions and conflicts in the world will cease, and we’ll find ourselves living in a utopia. Which is why I think defence giant BAE Systems (LON:BAES) (LSE: BA) is a great pick for long-term investment. A trusted partner of western governments, 42% of its revenue comes from the US and 21% from the UK. Other markets include Australia, India and several countries in the Middle East, notably Saudi Arabia. There’s some uncertainty about trading with Saudi Arabia right now, but for me this doesn’t detract from BAE’s long-term prospects.
Indeed, I think this type of situation generally presents an opportunity for long-term investors to pick up shares at an attractively cheap valuation. Right now, you can buy BAE stock for 11.6 times forecast earnings, with a prospective initial dividend yield of 4.3%. It strikes me as terrific value.
Key operator National Grid (LON:NG) (LSE: NG) operates at the heart of the UK’s gas and electricity networks. In fact, to a large extent it’s a monopoly as near as dammit. It also owns regulated assets in the US. The UK and the US each contribute about 50% to the group’s total operating profit. It’s built to be one of the most stable businesses around, delivering steady, if unspectacular, returns for its shareholders. Jeremy Corbyn plans to nationalise it (and a host of other key infrastructure businesses), if Labour gets into power. It would be a highly problematic, lengthy and expensive process for the government, if it ever happens, and the risk doesn’t put me off the stock.
I’m attracted by its availability at 14.4 times forecast earnings, which is below the average of its historical norm. And I’m even more attracted by its generous prospective initial dividend yield of 5.8%.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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