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3 FTSE 100 dividend stocks with yields over 5% I’d buy in September

Roland Head
Various denominations of notes in a pile

The recent market sell-off made headlines. But it’s worth keeping this in perspective. Despite the recent volatility, the FTSE 100 is actually up by about 6% so far this year.

When you add in the FTSE’s current dividend yield of 4.6%, index-tracking investors look set to enjoy a 10%+ return this year.

Of course, the market may go up or down this autumn. My approach is to ignore this short-term noise and focus on buying good quality dividend stocks at reasonable prices.

Today, I’m going to look at three FTSE stocks I own with dividend yields of more than 5%.

This £183bn firm looks cheap to me

Royal Dutch Shell (LSE: RDSB) needs no introduction. The oil and gas supermajor is the biggest company on the FTSE 100. It’s responsible for a fair chunk of the index’s 4.6% dividend yield.

However, if you buy the stock direct, you should get to enjoy a 6.6% dividend yield this year. Dividends are never guaranteed, but Shell’s payout hasn’t been cut since World War II. I wouldn’t worry about a cut.

Two things investors are worried about are the falling price of oil and the environmental risks of burning oil. Shell is slowly pivoting towards gas to try to address these risks and secure its long-term future.

Rightly or wrongly, I think the world will be burning a lot of oil-based fuels for many years to come. In my view, the risks are reflected in the Shell share price. Trading on 11 times earnings with that chunky 6.6% yield, I rate the shares as an income buy.

A friend in need

We don’t know how good our car insurance companies are until we need to make a claim. But one company that’s been around a while and developed a strong brand is Direct Line Insurance Group (LSE: DLG).

I like the group’s solid profitability and good cash generation. However, this sector is out of favour with investors at the moment, as profits are under pressure from rising claims costs. Tough competition means that putting up prices is difficult.

The Direct Line share price has fallen by 12% over the last year, pushing the stock’s ordinary dividend yield to 7.3%. Analysts’ forecasts suggest an optional special dividend will be paid too, lifting the total yield to 9.5%.

I’m not sure about this, but I see the firm as a long-term survivor. In my view, the shares offer good value for long-term income investors at current levels. I may buy more for my portfolio.

New growth opportunity?

Cardboard packaging isn’t glamorous. But it is essential. The business is growing too. Bosses at DS Smith (LSE: SMDS) recently reported “double-digit growth” in sales of e-commerce packaging.

The firm also believes that new cardboard products could soon replace a lot of the plastic packaging found in supermarkets, as retailers try to reduce non-recyclable waste. Company bosses reckon that 1.5m tonnes of plastic in supermarkets could readily be replaced by Smith’s cardboard products.

One risk for shareholders is that an economic slowdown could dent demand for packaging materials, as shoppers buy less.

So far, there doesn’t seem to be any evidence of this. And with the shares trading on just 9 times forecast earnings, I think the DS Smith share price already reflects a cautious outlook. I’ve added this 5.3% yield to my portfolio and remain a long-term buyer.

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Roland Head owns shares of Direct Line Insurance, DS Smith, and Royal Dutch Shell B. The Motley Fool UK has recommended DS Smith. 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 2019