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Could these 4 FTSE 100 high yield dividend bargains make you a million?

Royston Wild

The FTSE 100 can be a dangerous place for those seeking dividend stocks that cost next-to-nothing.

Some shares are genuinely undervalued by the investment community, while some trade at rock-bottom prices for a very good reason. So how do the stocks discussed below stack up?

Oversupply problems

At face value Anglo American (LSE: AAL) may be the stock of dreams for thrifty income investors. The business trades on a forward P/E ratio of 9.1 times and, thanks to predictions that the dividend will clock in at 108 US cents per share in 2018, the miner sports a large 4.9% yield.

On the downside, I am concerned that the recent cooldown in iron ore values is in danger of intensifying in the medium term and beyond, and my pessimism is reflected in current profits forecasts — Anglo American is predicted to endure a 5% earnings slip this year. And this should intensify with a 16% duck in 2019, or so say City brokers.

These pressures are expected to drive the dividend lower again next year, resulting in an estimated 97-cent reward. This may still yield an appealing 4.4%, but signs that the supply/demand imbalance in the iron ore market is set to persist and thus keep profits at Anglo American locked in a tailspin is encouraging me to keep my cash in my wallet.

Aside from the obvious dangers created by US President Donald Trump’s ‘trade wars’, I am concerned by the number of mega mining projects coming on-stream over the next several years. Just this week, for example, Rio Tinto announced plans to begin developing its Koodaideri asset in Western Australia, news which followed fresh development details on other massive projects from several other major iron ore producers in recent days.

Demand from China may well remain robust, but I doubt the Asian powerhouse can suck up all of the extra material that’s about to enter the market. This issue is reflected in Anglo American’s low forward P/E ratio, and makes the business unsuitable for those with any intolerance of risk, in my opinion.

Build a fortune

Taylor Wimpey (LSE: TW)isn’t without problems of its own due to a combination of slowing house price growth and escalating construction costs.

Despite this, however, the shortage of new homes being created in the UK means that demand is continuing to outstrip supply. Indeed, the Footsie business commented in April that “the underlying housing market has remained stable in the first four months of 2018, with continued good accessibility to mortgages at competitive rates,” and this helped its order book remain at a bulky £2.1bn as of the end of April.

Against this backcloth, the City is expecting fractional earnings growth during the present year, which is expected to rev to 4% in 2019. While hardly spectacular, these forecasts result in a forward P/E ratio of just 9.1 times. They are also robust enough to likely keep Taylor Wimpey’s dividend yields on the right side of spectacular.

A 14.9p per share payout is estimated for this year, resulting in an 8.1% yield. And the dial moves to 8.8% for next year thanks to expectations of a 16.6p dividend.

A new direction?

As I noted last time out, WPP (LSE: WPP) is facing something of an existential crisis at the present time following the departure of company architect Martin Sorrell in the spring.

It’s not all doom and gloom, however. Many of those in the know suggest that the former chief executive was slow to adapt to the changing nature of advertising in an increasingly-digitalised world, and that Sorrell’s departure will shake the cobwebs from WPP’s model and allow a new leader to bring in new ideas.

The incoming CEO will have to first address the problem of difficult trading conditions in the advertising market, as evidenced by WPP’s troubled market update last week in which it advised reported revenue for the first four months of 2018 fell 3.4%.

Signs are beginning to emerge that the end of the trough in the North American marketplace, a knock-on effect of advertising overspending in recent years, is imminent. So WPP may be in a rut at the moment, causing brokers to predict a 26% earnings dip in 2018, but things are finally starting to look up (underlined by the 5% earnings rebound forecast by the City).

A forward P/E ratio of 10.3 times is low by any standards and leaves plenty of room for an upward share price re-rating as trading numbers likely pick up from the second half of this year. And when you throw predicted dividends of 60.5p and 62.6p per share for 2018 and 2019 into the equation too — targets that yield a bulky 5% and 5.2% — well, I consider the ad ace to be a very attractive investment destination today.

Dividends blasting higher

My final selection is RSA Insurance (LSE: RSA), a business whose electric dividend rises are expected to keep on coming.

With the costs of colossal restructuring now behind it, current City forecasts are suggestive of earnings growth of 15% this year and 8% next year. Subsequently RSA — which has almost doubled the dividend over the past three years — is expected to lift the reward to 29p per share in 2018 from 19.6p last year, and again to 34p in 2019.

These projections yield a handsome 4.3% and 5.1% respectively which, along with a forward P/E ratio of 13.4 times, provide plenty of bang for investors’ bucks.

While conditions in the insurance market remain tricky, I am convinced RSA’s robust position in the UK, Canada and Scandinavia should still pave the way for bright profits growth and thus keep dividends expanding at quite a pace.

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Royston Wild owns shares in Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. 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.