The most popular method for choosing passive income stocks is to compare yields.
The table below shows the current top 10 yielders on the FTSE 100.
Stock
Yield (%)
Vodafone
10.17
M&G
9.55
Phoenix Group
9.41
Legal & General
9.12
Rio Tinto
8.98
British American Tobacco
8.56
HSBC
7.28
Aviva
7.07
Imperial Brands
6.84
Schroders
6.16
Source: Trading View/data at 2 October 2024
But which is the best? In other words, which is the one with the dividend that’s most likely to be sustained?
Buyer beware
The first thing to note is that the list must be treated with caution.
The information is compiled based on amounts paid during the past 12 months. However, we know that Vodafone is planning to reduce its payout by 50% this year.
Also, it’s important to consider one-off events. In June, HSBC paid a special dividend of $0.21 following the sale of its business in Canada. This is unlikely to be repeated over the next 12 months.
And a company with volatile earnings is likely to have erratic dividend payments. Rio Tinto is exposed to international commodity prices, meaning its return to shareholders is almost impossible to predict.
Looking back
Because dividends are never guaranteed — and nobody can see into the future — history is sometimes the only (if flawed) way of establishing how reliable they might be.
Looking at the five financial services companies in the top 10, M&G became a standalone business in 2019. In my view, this is too short a period to confirm any pattern.
And as the table below illustrates, over the past five years, there’s been no clear trend in the dividend payments made by Aviva and Schroders.
Year
Aviva (pence per share)
Schroders (pence per share)
2019
9.50
114.00
2020
27.00
114.00
2021
22.05
122.00
2022
31.00
52.00
2023
33.40
21.50
Source: Hargreaves Lansdown
Both Phoenix Group and Legal & General are more reliable. During the past 25 years, the latter only cut its dividend during the global financial crisis.
Although I’d have to do more research before buying either, at first glance they appear to be excellent income shares.
Going up in smoke?
Tobacco companies have a long track record of paying substantial dividends. That’s because their high-margin cheap-to-make products are hugely cash generative.
Indeed, British American Tobacco (LSE:BAT) qualifies as a Dividend Aristocrat as it has increased its payout ever year for a quarter of a century.
However, with increasing restrictions on the sale of cigarettes, both British American Tobacco and Imperial Brands are diversifying into vapes and other non-combustible alternatives.
But these have a long way to go before they generate the same levels of revenue and earnings as traditional tobacco products.
During the six months to 30 June 2024, British American’s New Categories contributed 13.2% to revenue and 2.3% of operating profit. In the six months ended 31 March 2024, Imperial Brands’ Next Generation Products were loss-making and accounted for 1.6% of turnover.
However, governments around the world are placing restrictions on these so-called ‘reduced risk’ products. And they are more expensive to make which will reduce the level of surplus cash available for shareholders.
But for now, the sale of cigarettes generates lots of cash. In 2024, British American Tobacco expects to convert 90% of its adjusted operating profit into operating cash flows.
It’s ironic that, in my opinion, it is the best dividend stock in the top 10 but one that I wouldn’t want to buy.
That’s because I’m a long-term investor and — eventually — I think there’s going to be an inflection point where the cash generated from the sale of traditional cigarettes falls more sharply than the increase coming from new products. Its generous and reliable dividend will then come under threat.
The post All yielding over 6%, which of the FTSE 100’s top 10 passive income stocks is the best? appeared first on The Motley Fool UK.
AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!
Buckle up because we’re about to dive headfirst into the electrifying world of AI.
Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.
If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – ‘AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!
And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?
Get your free AI stock pick
More reading
How I’d use £10 per day to build up to a second income worth £33 a day
£5,000 in cash lying around? Here’s how I’d use that to target passive income
These are my 3 top FTSE 100 dividend shares to consider buying right now
With a forward P/E of 7.9 and an 8.2% yield, is this the FTSE 100’s best value stock?
8.6% dividend yield! Is this cheap FTSE 100 stock a ‘no-brainer’ buy for passive income?
James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., HSBC Holdings, Hargreaves Lansdown Plc, Imperial Brands Plc, M&g Plc, Schroders Plc, and Vodafone Group Public. 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.
