The London Stock Exchange is home to dozens of ultra-high-yield stocks. These are shares that offer mighty dividend yields and can provide investors with an attractive second income.
Here are two from the FTSE 100 that I’d buy today if I didn’t already own them.
9.4% yield
First, I’d snap up Legal & General (LSE: LGEN). With the share price currently at 226p, this means the forward-looking dividend yield is an eye-popping 9.4%. That’s one of the highest in the UK market today.
A sky-high yield like this could be viewed as a warning sign that a dividend cut might be coming. And while this can never be ruled out with shares, Legal & General’s payout prospects look solid to me.
In H1, the insurer’s core operating profit edged up slightly to £849m, while the interim dividend was lifted by 5% to 6p a share. Its operating return on equity increased to 35.4%, up from 28.6% in H1 2023.
One negative was that assets under management dipped slightly to £1.13trn. Despite this, asset management revenues were up 6% during the half.
A risk here would be a recession in the US, where the firm is growing its presence. That could lead to consumers and businesses cutting spending on financial products like life insurance, pensions, and investment funds, all core offerings from Legal & General. That could result in lower earnings.
Looking to the full year though, management expects core operating earnings to grow by mid-single digits. Meanwhile, the balance sheet remains strong and a £200m share buyback is ongoing.
I’d invest today to aim to lock in that pocket-padding 9.4% yield.
8.5% yield
Next up is British American Tobacco (LSE: BATS). This is the owner of cigarette brands including Lucky Strike and Rothmans, as well as Velo (oral nicotine pouch), Vuse (e-cigarettes), and Glo (heated tobacco).
The forward yield here is a mountainous 8.5%. It was over 10% a few months ago when I invested but the share price has jumped by around 21%, year to date.
Despite this rise, the stock is still dirt cheap, trading at just 7.7 times forecast earnings. This likely reflects the big risk here, which is that the company’s main cigarette business is in structural decline.
Last year, for example, there was cigarette volume growth in Bangladesh, Brazil, and Turkey, but this was more than offset by lower volume in the US. And while it did attract 1.4m new smokeless consumers over the past year, it remains uncertain if this division will ever match the profitability of cigarettes.
However, the tobacco giant still expects both full-year revenue and adjusted earnings per share to grow by low single digits. And it plans to repurchase £700m worth of shares this year and £900m next year.
Looking ahead, the firm reckons it will generate £40bn in free cash flow over the next five years. That should more than cover the approximately £5.1bn a year it’s paying out in dividends.
Therefore, this is another FTSE 100 stock that I believe can deliver on its ultra-high yield.
A grand a year
If I invest £5,600 in each of these stocks, the average yield would total just under 9%. This would generate £1,000 a year in passive income.
The post 2 ultra-high-yield shares I’d buy for a £1,000 annual second income appeared first on The Motley Fool UK.
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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.
