Very high dividend yields expected from these FTSE 100 stocks

The FTSE 100 currently has five stocks with dividend yields between 9% and 10%. That is more than double the index average of 3.8%.

In this article I will address each of these points and go into more detail about the stock I chose for my own portfolio.

Let’s start by looking at the five stocks in question:

Why are these dividend yields so high?

The dividend yield of a share is the value of the dividend as a percentage of the share price. A company with a dividend of 10p per share and a share price of 100p has a yield of 10%.

One reason these dividend yields are so high is that these companies all trade on low price-earnings (P/E) ratios.

For example, British American Tobacco trades at a forward price/earnings ratio of seven with a yield of 9.3%.

If BAT’s share price rose to an average price/earnings ratio of 14 (FTSE 100), the dividend yield would fall to 4.7%.

Why are all these stocks so cheap?

These are big companies, but they are also quite mature. I think a lot of investors are uncertain about their growth prospects. That’s why they may seem cheap.

For British American Tobacco, smoking has been in decline in many countries for a long time. The profitability of replacement products such as vapes is not yet clear.

Pension funds Phoenix and M&G both rely heavily on legacy businesses for a large portion of their profits. While both companies are making progress in expanding their new business lines, success is not yet certain. If things don’t go to plan, dividend cuts may be necessary.

HSBC generates a large part of its profits in Hong Kong and depends on good relations with China. Although I like the company, there is a bit too much political risk for me.

My pick of the five – and the share I own myself – is Legal & General.

Why I should buy L&G

Legal & General is one of the oldest names in the UK pensions industry. Over the past decade, the company has carved out a valuable niche in the pensions market by buying up companies’ final salary schemes.

The story continues

This business is expected to continue to grow. By the end of 2028, new CEO António Simões expects to bring in up to £65bn of pension business annually, compared to £13.7bn in 2023.

To support and successfully invest these pension assets, Legal & General has a large asset management division.

Currently, this is split between two units. One deals with alternative assets such as real estate, while the other deals with conventional investments such as stocks and bonds.

Simões wants to merge these into one entity. I understand why, but I think this restructuring could be risky and lead to teething problems.

If all goes according to plan, L&G expects to grow earnings by 6%-9% per year between now and 2027. Dividends are expected to grow by 2% per year over this period, with share buybacks on top of that.

For a stock that already offers a yield of more than 9%, I find a dividend growth of 2% acceptable.

If I had new money to invest, I would like to top up my investments at current levels.

The post Very high dividend yields expected from these FTSE 100 stocks appeared first on The Motley Fool UK.

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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 Plc, HSBC Holdings, and M&g Plc. The opinions expressed about the companies mentioned in this article are those of the writer and as such 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.

Motley Fool UK 2024