The FTSE 100 currently has five stocks with dividend yields of between 9% and 10%. That’s more than double the index average of 3.8%.
In this piece I’m going to comment on each of these and take a longer look at the share I’ve chosen for my own portfolio.
Let’s start with a look at the five stocks in question:
Company
2024 forecast dividend yield
Phoenix Group
10.0%
M&G
9.6%
HSBC Holdings
9.5%
Legal & General (LSE: LGEN)
9.3%
British American Tobacco
9.3%
Why are these dividend yields so high?
The dividend yield of a stock is the value of the dividend as a percentage of its share price. A company with a dividend of 10p per share and a share price of 100p will have a 10% yield.
One reason why these dividend yields are so high is that these companies all trade on low price-to-earnings (P/E) ratios.
For example, British American Tobacco trades on a forecast P/E of seven with a 9.3% yield.
If BAT’s share price rose so that it traded on the FTSE 100 average P/E of 14, its dividend yield would drop to 4.7%.
Why are these shares all so cheap?
These are large businesses, but they’re also quite mature. I think many investors are uncertain about their growth prospects. That’s why they may seem cheap.
For British American Tobacco, smoking is in long-term decline in many countries. The profitability of replacement products like vapes isn’t yet clear.
Retirement groups Phoenix and M&G both rely heavily on legacy businesses for much of their profits. Although both companies are making progress expanding their new business lines, success isn’t yet certain. If things don’t go to plan, dividend cuts might be needed.
HSBC generates much of its profit in Hong Kong and is dependent on good relations with China. While I like the business, there’s a bit too much political risk for me.
My pick of the five – and the share I own myself – is Legal & General.
Why I’d buy L&G
Legal & General is one of the oldest names in the UK retirement sector. Over the last decade, the company has built a valuable niche in the pension market, buying out companies’ final salary schemes.
This business is expected to continue growing. By the end of 2028, new CEO António Simões expects to be winning up to £65bn of pension business each year, up from £13.7bn in 2023.
To support these pension assets and invest them successfully, Legal & General has a big asset management operation.
At the moment, this is split across two units. One looks after alternative assets like property, while the other deals with conventional investments like stocks and bonds.
Simões wants to combine these into one unit. I can see why, but I think this restructuring could be risky and lead to teething problems.
If everything goes to plan, L&G expects to deliver earnings growth of 6%-9% per year between now and 2027. The dividend is expected to rise by 2% per year over this period, with share buybacks on top.
For a stock that already offers a yield over 9%, 2% dividend growth is acceptable to me.
If I had new cash to invest, I’d be happy to top up my holding at current levels.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Roland Head has positions in Legal & General Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., HSBC Holdings, and M&g Plc. 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.
