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There are a host of FTSE 100 stocks offering sizeable dividend yields. The average yield for the index is just 3.6%, but there’s a handful of stocks with yields more than double that.
The thing is, we can’t always trust big yields. In fact, it pays for us to be wary. So let’s take a closer look at some of the biggest on the FTSE 100, and explore what makes a yield sustainable.
Let’s start by addressing what is sustainable. Unfortunately, some dividend yields are just too good to be true. No dividends are guaranteed and they can be cut at any point. But if we do our research, we stand a better chance of investing in companies with reliable dividends.
We can start by looking at dividend coverage ratios. This is a financial metric that measures the number of times a company can pay dividends to its shareholders from its earnings. A coverage ratio above two is broadly considered healthy.
However, it’s worth recognising that cash flow is important here. Some companies, such as those in the pharma sector, may generate very little income for several years, and then see a huge spike as a new product receives approval. In such a case, dividend coverage could vary considerably year to year.
As such, I also look at companies with lower dividend coverage ratios, but strong cash flow.
The biggest yields
Some of the biggest sustainable yields on the FTSE 100 appear to be around 8% at the moment. However, several of these are stocks don’t tend to offer much in the way of share price growth and don’t often engage in share buybacks.
So here are the six stocks on the FTSE 100 currently offering dividend yields above 8%.
|Legal & General||8.2%|
|British American Tobacco||8.1%|
Phoenix Group and Legal & General are already part of my portfolio. The companies offer very little in the way of share price growth, historically at least. However, I took the chance to top up on these stocks in recent months and weeks after the US banking crisis pushed the Legal & General and Phoenix Group share prices into reverse.
Glencore is another company on this list to interest me, but I’m yet to add it to my portfolio. The mining giant has a dividend coverage ratio around 1.8, which is still pretty strong. However, it’s a volatile part of the market, especially at this moment with so many competing and changing narrative about economic growth in 2023 and beyond.
I’m less keen to invest in British American Tobacco. One of the reasons it trades with low multiples and a high dividend yield is the lingering concern that regulatory change could have a profound impact on the business.