I’m shopping for FTSE 100 stocks that offer high dividend yields.
As a starting point, I found a list of the biggest payers, yielding from 7.4% all the way up to 9.9%.
But I’m wary of falling victim to a bait-and-switch. What if I buy the stock today for its sky-high yield, only for that dividend to be cut a few months later?
Here are two simple tests I use to try and avoid such a disappointment.
Payout ratios
First, I like to look at the payout ratio. This tells investors whether the company’s dividends are covered by earnings. If a company pays dividends that are not backed up by its earnings, it must be drawing down its cash reserves or even going into debt to sustain them.
This simple metric shows me right out of the gate that the FTSE 100’s highest dividend yielder, global investment manager M&G, paid out 20p per share in 2022 while earning -67p. That loss was blamed on “negative market movements from the volatility experienced in markets throughout a challenging year”.
Company
Sector
Dividend yield
2022 Payout ratio
M&G
Investment banking and brokerage services
9.9%
negative
Phoenix Group Holdings
Life insurance
9%
63%
Legal & General Group
Life insurance
8.6%
50%
Vodafone
Telecommunications service providers
8.3%
120%
British American Tobacco
Tobacco
8.2%
98%
Rio Tinto
Industrial metals and mining
8%
65%
Aviva
Life insurance
7.6%
47%
Taylor Wimpey
Household goods and home construction
7.5%
52%
Imperial Brands
Tobacco
7.4%
85%
Data sources: TradingView and dividenddata.co.uk
Meanwhile, Vodafone paid out 120% of its earnings per share in dividends, as the telecommunications company’s earnings depressed by regulations from Brussels that put an end to roaming charges within the EU and the EEA.
British American Tobacco’s dividends were just about covered by earnings, with a payout ratio of 98%. That is far too small a margin for comfort in my view.
After applying the first test, I’m left with six contenders in the running: Phoenix Group Holdings, Legal & General, Rio Tinto, Aviva, Taylor Wimpey, and Imperial Brands.
Consistency is key!
Next, I’m looking to see how stable the dividend is. For this test, I’ll eliminate all the companies that have reduced their dividend payout at some point between 2016 and 2022.
That is not especially strict, considering there are plenty of so-called Dividend Aristocrats out there – that is, companies with 25 consecutive years of dividend growth.
Company
2016
2017
2018
2019
2020
2021
2022
Phoenix Group Holdings (£)
0.42
0.45
0.46
0.47
0.47
0.49
0.51
Legal & General (£)
0.14
0.15
0.16
0.18
0.18
0.18
0.19
Rio Tinto (£)
1.34
2.13
2.33
3.01
3.42
5.78
4.07
Aviva (£)
0.31
0.36
0.39
0.2
0.28
0.29
0.31
Taylor Wimpey (£)
0.03
0.05
0.06
0.04
0.04
0.09
0.09
Imperial Brands (£)
1.55
1.71
1.88
2.07
1.38
1.39
1.41
Data source: TradingView
Phoenix Group Holdings and Legal & General are the only two that pass that test.
What next?
Having whittled down the list from nine to just two, I have given myself a more manageable workload.
I’ll now want to leaf through a few years’ worth of annual reports from Phoenix Group Holdings and Legal & General to better understand their businesses before making any decisions.
The post These 9 FTSE 100 stocks have dividend yields of up to 10%! appeared first on The Motley Fool UK.
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Mark Tovey 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.