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Should I buy these 5 FTSE 100 stocks with yields above 5%?

Kevin Godbold
·3-min read
FTSE 100 (London Stock Exchange Share Index) on Gold Coin Stacks Isolated on White
FTSE 100 (London Stock Exchange Share Index) on Gold Coin Stacks Isolated on White

One decent investment strategy involves buying shares to harvest their dividend yields.

I could collect the dividends as personal income or reinvest them with the aim of keeping my investment pot growing.

But key to the strategy is the sustainability of dividend payments. Company directors have the freedom to raise, lower, cancel or suspend shareholder dividend payments according to trading conditions and other factors. So, I’d want to be confident dividend payments are well covered by cash flowing into the underlying business. And I’d attempt to analyse the potential of a business to keep on paying dividends in the years ahead.

FTSE 100 stocks with big, growing yields

My ideal dividend investments would be in companies that raise the dividend a little each year. Usually, that means revenue, earnings and cash flow will tick higher annually because the business is trading well.

So, with that in mind, should I buy shares in the following 5 FTSE 100 companies that each have a dividend yield above 5%?

Stock

Recent share price

Forward-looking dividend yield

EVRAZ

515p

8.8%

Persimmon

2,716p

8.6%

Imperial Brands

1,650p

8.7%

SSE

1,547p

5.5%

Legal & General

265p

6.9%

EVRAZ is a steel, mining and vanadium business with operations in the Russian Federation, the US, Canada, the Czech Republic and Kazakhstan. As such, operations are cyclical in nature and we can see that playing out in the patchy record for revenue, earnings, operating cash flow and shareholder dividends.

The stock is flying high right now and the business is generating rising projected earnings and a chunky dividend. But there isn’t the long-term stability and steady growth I’m looking for with my dividend investment strategy. So, I’d avoid EVRAZ when it comes to my dividend portfolio.

Housebuilder Persimmon is another company operating a business in a cyclical sector. Dividends are high and rising now, but valuations and share prices in the sector can be erratic, sometimes leading to lacklustre shareholder returns overall. So, for this strategy, I’d avoid the stock.

Composite insurer, savings and investment business Legal & General has been trading well for several years. And the company has done a good job maintaining and raising its dividend. But I can’t deny the inherent cyclicality in much of the business. Because of that, the stock doesn’t make the cut for my long-term dividend portfolio.

Defensive sectors

Smokers’ products manufacturer Imperial Brands operates in the wider fast-moving consumer goods sector. That’s an attractive, defensive sector to me and IMB’s record of strong and generally rising cash flow suggests dividend payments are sustainable with the potential to grow. I would buy this stock for my dividend portfolio, despite risks such as declining smoking rates in the developed world.

Electricity company SSE is another that would make it into my dividend portfolio. It has faced challenges in the past (lower earnings, rising debt). But it sold its retail business for £500m, its cash flow is strong and I reckon there’s potential for the dividend payment to grow in the years ahead. The sector is traditionally seen as defensive and the company looks well placed within it.

The post Should I buy these 5 FTSE 100 stocks with yields above 5%? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Imperial Brands. 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 2021