Earning a second income is a key investment priority for me. To pursue this goal, I’m heeding the advice of Warren Buffett. The billionaire’s consistently championed the merits of owning productive assets, such as dividend shares, over unproductive assets like precious metals.
So, although there’s a case for investing in gold, I’m focused on buying dividend stocks instead. And I think there are few better places to look than the FTSE 100 index.
Here’s why.
The case for gold
Gold has been used as a store of value for millennia. Its history as an investment and medium of exchange predates the creation of the world’s first company, let alone the stock market. Today, jewellery manufacturing is the source of around 50% of global demand.
In addition, central banks are major purchasers. Reserve asset management has a significant — and often unpredictable — impact on the gold price. The precious metal also has some industrial applications from consumer electronics to dentistry.
Via exchange-traded funds or bullion, investors gain exposure to a unique asset in gold. It’s less correlated with stock market returns than many leading commodities. Some analysts point to an inverse correlation, suggesting it provides portfolio diversification.
Gold might be handy in mitigating the risk of stocks underperforming, but it also carries volatility risk. I wouldn’t want to own too much.
Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.
Warren Buffett, Berkshire Hathaway shareholder letter 2011
With no dividends on offer, the yellow metal won’t provide me with an ounce of passive income. So, for regular cash payouts, I’m turning my attention elsewhere.
Dividend stocks
That brings me to FTSE 100 dividend shares. Currently, the blue-chip benchmark offers an average dividend yield of 3.8%. That’s higher than many overseas indexes.
Plus, UK stocks look cheap. The Footsie trades at an 8.6 times price-to-earnings ratio, compared to the S&P 500‘s 22.1 multiple.
Granted, dividends aren’t guaranteed. Companies can cut or suspend distributions at any time. But, that’s a risk I’m prepared to take.
Currently, I own a variety of dividend shares in different sectors. Examples include:
- British American Tobacco — 9.1% yield
- Diageo — 2.3% yield
- Lloyds — 5.4% yield
- Rio Tinto — 8% yield
- Tesco — 4.4% yield
I plan to own these shares for a long time. By reinvesting dividends, I’m aiming to harness the power of compound returns over years and eventually earn a sizeable second income.
For instance, with a £600k portfolio that yielded 5%, I’d earn £30k in annual dividend income.
What about gold miners?
There’s another way to gain gold exposure without having to own what Buffett dubs a “lifeless” metal. Many gold-mining stocks pay dividends.
For example, there’s Fresnillo. This FTSE 100 company is the world’s largest producer of silver from ore, but it’s also Mexico’s second-largest gold miner.
I own shares in Centamin, an Africa-based FTSE 250 gold miner, and the Canadian gold-mining giant Barrick Gold. Both stocks offer healthy dividends.
For investors who like the yellow metal, gold miners deserve consideration. However, for me, a diversified mix of Footsie dividend shares remains the keystone of my investment portfolio.
