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How I plan to earn a 5% yield with these FTSE 100 UK shares

Rupert Hargreaves
·3-min read
Graph Falling Down in Front Of United Kingdom Flag
Graph Falling Down in Front Of United Kingdom Flag

Since the beginning of 2020, interest rates available on savings accounts have plunged. Unfortunately, many UK shares have also slashed their dividend payouts to investors.

However, there are still plenty of income options out there for investors on the market. With that in mind, I’m going to take a look at a handful of FTSE 100 shares with dividend yields of 5% or more.

UK shares to buy for income

When looking for income in today’s market, investors need to be careful. Many FTSE 100 companies look attractive from an income perspective at first glance. Still, there’s no guarantee these companies can maintain their shareholder distributions in the current economic environment.

As such, I reckon investors should concentrate on finding businesses with a high level of dividend cover. Strong balance sheets and large profit margins could also be a mark of a healthy dividend candidate, in my view.

There are quite a few UK shares that meet these criteria. Car insurance giant Admiral has a robust balance sheet and some of the most attractive profit margins in the insurance industry. Its dividend cover is a bit hard to understand due to the way insurance profits are booked. Nevertheless, the business has an excellent track record of returning cash to investors.

Although the company put its dividend on ice earlier in the year, it now supports a prospective dividend yield of 6%.

Another FTSE 100 company with a dividend yield of more than 5% is British American Tobacco. Ethical considerations aside, as UK shares go, this tobacco group is an income champion.

BATS generates billions of pounds in cash every year and has a strong balance sheet. It has consistently reported an operating profit margin of nearly 40%. The current dividend payout is covered 1.6 times by earnings per share. The stock supports a dividend yield of 7.7%.

Cash cows

Other UK shares I think are worth considering for an income portfolio today include Plus500. This company doesn’t feature in the FTSE 100, but I think it’s worth considering nonetheless.

The financial services group currently offers investors a dividend yield of just under 5%. The payout is covered 2.9 times by earnings per share. The company has been making so much money recently it has been using excess cash to repurchase stock.

Another opportunity is mining giant BHP. The stock currently supports a dividend yield of around 6%, and the payout is covered 2.4 times by earnings per share.

Governments around the world are planning massive infrastructure spending plans to help their economies recover from the coronavirus pandemic. This should lead to an improved outlook for BHP, which is one of the world’s largest producers of crucial commodities, such as copper and iron ore.

Another financial services business on my list of UK shares to buy for income is insurance giant Aviva. The stock currently supports a dividend yield of 9%. Although some analysts have been speculating that this distribution could be cut, even a 50% reduction would leave the stock offering a market-beating 4.5% yield.

The post How I plan to earn a 5% yield with these FTSE 100 UK shares appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in Admiral Group and British American Tobacco. The Motley Fool UK has recommended Admiral Group. 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