Option 1: Buy the FTSE

No single company can guarantee to prosper forever. But I think it’s fair to expect that there will always be many large, successful companies. And a good number of these are likely to trade on the London Stock Exchange.

To earn an income from these companies without having to guess which they are, I think the safest solution is to buy a FTSE 100 tracker fund. These are cheap stock market funds which track the movement of the FTSE 100 index of the UK’s largest publicly-traded companies.

At the time of writing, the FTSE 100 offers a dividend yield of 4.5%. That’s fairly high by historic standards and looks attractive to me. Although I think dividend growth may be slow from this point, a FTSE 100 tracker could be a buy-and-forget income solution for the rest of your life.

Option 2: Try and beat the market

Some companies perform better than the market, some worse. And this year’s winners may be next year’s losers.

But there are some companies that have consistently outperformed the market for many years. In these cases, it’s sometimes possible to say that the businesses behind the stocks have a sustainable advantage over rivals.

Consumer giant

One example is FTSE 100 consumer goods giant Unilever (LSE: ULVR). A global portfolio of famous brands including Domestos, Hellman’s, Carte D’Or and Marmite help the group to generate double-digit profit margins and plenty of surplus cash.

Shareholders have reaped the rewards. The Unilever dividend has risen by nearly 50% over the last five years. That’s an average of about 8% per year. The shares have also performed well. They’ve gained about 75% over the last five years, compared to a rise of just 5% for the FTSE 100.

Unilever faces challenges from changing consumer tastes. The shares aren’t cheap either, priced at about 19 times 2019 forecast earnings, with a 3.5% dividend yield. But this business has survived and prospered for more than 100 years. I think this good progress is likely to continue.

The world’s favourite hotels

Another FTSE name with a long track record of beating the market is Intercontinental Hotels Group (LSE: IHG). You’ll probably know this firm better by some of its hotel brands, which include Intercontinental, Holiday Inn and Crowne Plaza.

The secret to this company’s market-beating performance is that it no longer owns many hotels. Instead, it applies its brands to hotels owned by other companies, through a mix of managed leases and franchise arrangements.

This approach enables IHG to earn a return on capital — a measure of profits — of nearly 40%. Minimal outlay is required each year, with the result that much of this cash is returned to shareholders, or used for growth-enhancing expansion.

Like Unilever, IHG shares have thrashed the market, climbing more than 50% in the last five years. This stock isn’t cheap, trading on 19 times forecast earnings, with a 2.1% yield. But I believe this is a business that should continue to prosper and outperform for many years. I’d be happy to buy these shares today and hold them forever.

The post Have £5k to invest? I think these FTSE 100 dividend stocks could pay you for life appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended InterContinental Hotels Group. 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.

Value hunters looking for bargain basement deals in the FTSE 100 will undoubtedly be intrigued by the eye-wateringly low 8.2 P/E ratio of Holiday Inn owner Intercontinental Hotels Group (LSE: IHG). But, is this global hotel giant a screaming bargain or a value trap waiting to be sprung?

Unfortunately for bargain hunters, IHG is certainly not the incredibly cheap stock its trailing P/E ratio would have us believe. That’s because last year’s earnings were significantly skewed by $1.3bn of asset sales that won’t be repeated in the future. Strip out the positive effects of these sales and IHG shares now trade at a much more pricey 24.9 times trailing earnings. So, IHG won’t be any value investor’s dream stock, but does that mean shares are necessarily a value trap?

With shares priced for considerable growth, the question becomes whether or not IHG can live up to the high expectations City analysts have set for it. The bad news is that in the nine months to September year-on-year growth in revenue per available room, the key industry metric, slowed to 1.8% on a constant currency basis, compared to 5.1% in the same period in 2015.

The main problem is that the industry has been adding new hotels at a rapid clip over the past few years as economies recovered from the Financial Crisis. But now that macroeconomic growth in key markets such as China and Europe is slowing, hotels are finding supply growth outstripping slowing demand growth.

This is obviously bad news for IHG, but investors can at least console themselves with the fact that management has significantly de-risked operations by selling off hotels it directly owns and transitioning to an asset-light franchised model. Yet this won’t be enough to prop up IHG shares should current trends persist in the coming years. With shares trading at a very high valuation and economic headwinds growing I wouldn’t be surprised to see share prices give back recent gains in 2017.

Fare wars

A more typical bargain hunter’s share is British Airways parent International Consolidated Airlines Group (LSE: IAG). After suffering a 20% drop in prices over the past year, IAG shares now trade at a miniscule 6.4 times trailing earnings while offering a hefty 3.9% dividend yield.

The reason IAG shares have sunk so low is fear that the European airline industry is approaching one of its frequent fare wars as years of adding new planes and new routes runs head first into slowing demand growth. Now, IAG is somewhat immune to these problems as its breadbasket routes are transatlantic ones that budget carriers have been largely excluded from. Instead, IAG competes largely with American carriers that have been much more restrained in their supply growth since the Financial Crisis.

The airline is also quite well positioned to survive any downturn as it has room to cut considerable fat from carriers such as Iberia and Aer Lingus. Trimming operating costs from these, as well as solid cash generation and a healthy balance sheet won’t completely shield IAG from any price wars in the industry, but they’ll go a long way. The airline industry’s cyclical nature will preclude me from buying IAG shares any time soon, but hardy value investors may find the shares an interesting contrarian pick.

The post Are these the FTSE 100’s best bargains or biggest value traps? appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.