My portfolio has about a dozen core dividend stocks that regularly pay me passive income.
Naturally, some will have higher yields than others. Right now, these two FTSE 100 stocks are carrying the highest.
British American Tobacco: 9.7%
The highest-yielding stock in my income portfolio right now is British American Tobacco (LSE: BATS). The tobacco stock is trading with an eye-popping 9.7% yield.
A quick glance at the stock chart shows us why. The shares are down 32% in two years. When the share price falls but payouts continue rising, the dividend yield goes up. That’s what’s happened here.
Last year, the firm increased the payout by 6%, advancing it to 231p per share.
Now, we all know that smoking around the world is on the decline. And that is the main risk with the stock. Long-term profits — and consequently the dividend — could be set to fall over time.
So why on earth am I invested?
Well, firstly, there’s the obvious lucrative passive income potential. I’m set to get nearly £1 back in dividends each year for every £10 I invest. I like the sound of that.
Next, I think the stock is significantly undervalued. We’re talking about a price-to-earnings (P/E) ratio of 6.4. That’s against a peer group average of around 13.
While not guaranteed, the stock market has a habit of eventually correcting such pricing anomalies.
Lastly, though global cigarette sales are falling on a volume basis, I don’t expect sales to fall off a cliff everywhere for many years.
A few foreign markets still have plenty of smokers and British American Tobacco is a global company.
Also, its New Categories division, which houses things like e-cigarettes and nicotine pouches, turned profitable in 2023. Vaping is a growth market, which diversifies the company’s revenue away from cigarettes.
The dividend appears well-supported. For 2024, it is covered 1.53 times by forecast earnings. British American Tobacco also has a multi-billion pound stake in Indian conglomerate ITC which it could one day sell down if need be.
Legal & General: 8.2%
Second, we have Legal & General (LSE: LGEN). The insurance giant has a target of increasing its dividend by around 5% a year. Right now, the yield sits at 8.2%.
Now, one concern here is where long-term growth is going to come from to sustain an increasing dividend.
The firm is currently expanding in North America, where only a small amount of pensions are managed by insurers. That’s a positive. But it may need to look further afield, possibly in high-growth markets like Asia.
That might open up execution risks.
Nevertheless, I reckon the long-term outlook for the firm’s retirement products looks bright as populations age and people realise a state pension won’t cut the custard.
Meanwhile, it ended last year with a Solvency II ratio of 224%, which means the balance sheet is strong and highly resilient.
Foolish takeaway
Admittedly, a high dividend yield can often be a red flag. It suggests the market is sceptical that the payout is sustainable. It is often the pre-cursor to a dividend cut, which is always possible.
In these cases, however, I think the high yields are likely to be met. Therefore, I intend to keep adding to each stock throughout the summer months to maximise my future passive income.
The post 2 ultra-high-yield UK stocks paying me passive income appeared first on The Motley Fool UK.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
More reading
Should I increase my stake in Legal & General or buy great value Aviva shares instead?
Here’s how I’d target a £5,900 second income by investing £50 a week
9%+ yields! Here are 2 of the best FTSE 100 dividend shares to consider buying
2 of my most amazing buys from the FTSE 100 for passive income
1 FTSE 100 dividend superstar I’d buy again over Lloyds shares right now
Ben McPoland has positions in British American Tobacco P.l.c. and Legal & General Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.