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11% dividend yields! Why I’d buy these UK shares for my ISA today

Roland Head
·3-min read
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.

Today, I’m going to discuss two UK shares which are currently expected to provide an 11% dividend yield this year. That’s an 11% cash return to shareholders on the current share price.

As a rule, I’m cautious about such high dividend yields. Very often, they turn out to be unsustainable. Even worse, they sometimes serve as a warning of more serious problems to come.

I don’t think that’s true here. In fact, I already own one of these UK shares in my Stocks and Shares ISA and would be quite happy to buy the other.

A cash cow?

My first pick is FTSE 100 firm Imperial Brands (LSE: IMB). Better known by its former name of Imperial Tobacco, this company is one of the world’s larger cigarette makers.

Of course, smoking isn’t exactly a growth industry these days. Imperial’s performance has stagnated in recent years and the group’s vaping product, blu, has been less successful than hoped.

However, there’s some good news, which is why I hold this UK share in my ISA portfolio.

Firstly, Imperial remains highly profitable. The group’s tobacco sales generate an underlying operating profit margin of around 38%, excluding duty payments.

More importantly for my 11% dividend yield, cash generation is strong. Producing cigarettes and cigars doesn’t require much in the way of capital investment or R&D. This means Imperial’s profits are converted reliably into surplus cash, which can be used for dividends.

For example, my sums show that last year’s operating profit of £2,197m converted into free cash flow of £2,206m. To put that in context, I expect this year’s dividend to cost about £1,325m.

Too cheap to ignore?

There are a couple of other bits of positive news too, in my view. The sale of the group’s premium cigar business has just completed. Over time, this will provide cash proceeds of €1.1bn to reduce debt.

Secondly, the firm has a new chief executive, Stefan Bomhard. He’s taking an active approach to stabilising the business and finding ways to return to growth.

Right now, the stock trades on just five times forecast earnings, hence the enormous 11% forecast yield. My sums show that this payout should continue to be supported by the company’s cash flow. Although there are risks, I think the shares offer great value at this level and I’d be happy to buy more.

An overlooked UK share with an 11% yield

The second stock I’m going to look at is asset manager M&G (LSE: MNG). This business was only recently separated from its former parent Prudential but has already earned a place in the FTSE 100.

Most of M&G’s assets are in the UK. Like Imperial, it’s a mature business that’s not growing very quickly. But M&G’s operations do appear to generate plenty of cash, even in difficult markets like we’ve seen this year.

The company’s recent half-year results showed capital generation of £202m and an operating profit of £309m. Both these numbers suggest to me that M&G’s interim dividend of £155m (6p per share) is comfortably affordable.

As things stand, M&G is expected to pay a total dividend of 17.9p per share for 2020. That gives the shares a forecast yield of 11%. I’d be happy to buy this UK share for my portfolio.

The post 11% dividend yields! Why I’d buy these UK shares for my ISA today appeared first on The Motley Fool UK.

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Roland Head owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Prudential. 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.

Motley Fool UK 2020