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A quarter of FTSE 100 offer 6%-plus yields! What should ISA investors do next?

Royston Wild
Stack of new bank notes

If you ask anyone here at The Motley Fool whether now’s a great time to go stock shopping it won’t take long to get an answer.

Of course investors need to be mindful of the slowing global economy before making their investments, not to mention critical geopolitical issues like Brexit and US-Chinese trade wars and their potential impact in 2020 and beyond. But, recent volatility means that there’s plenty of shares out there looking mighty attractive at recent prices.

And for dividend chasers, now seems to be a particularly great time to splash the cash, as a recent report from AJ Bell shows.

Monster yields smash Cash ISA rates

According to the financial services giant a quarter of FTSE 100 shares – 26, to be precise – now offer dividend yields of 6% or above for 2019. Compare that with, say, the returns on offer from a low-yielding, instant-access cash product like a Cash ISA (according to CompareTheMarket.com the best-paying of these products, from Leeds Building Society, gives an interest rate of just 1.46%).

But the good news from AJ Bell’s data doesn’t stop there. Apparently there are seven Footsie shares offering a yield of 8% or above, and four that provide yields of 10% or more.

In terms of the whole index, investors can currently rustle up a forward yield of 4.8%, fuelled by those ultra-low share prices for Britain’s big caps and expectations of more hefty dividend growth in 2019. AJ Bell says that FTSE 100 payouts will grow to a fresh all-time peak of £92.6bn this year.

Rank Company Dividend Yield
1 Evraz 15.3%
2 Taylor Wimpey 11.9%
3 Persimmon 11.5%
4 Imperial Brands 11.1%
5 BT 8.5%
6 Aviva 8.3%
7 Standard Life Aberdeen 8.1%
8 Rio Tinto 7.8%
9 Barratt Developments 7.5%
10 British American Tobacco 7.5%
11 Legal and General 7.5%
12 Centrica 7.2%
13 Phoenix Group 7.1%
14 Royal Bank of Scotland 6.9%
15 HSBC 6.9%
16 BP 6.7%
17 Royal Dutch Shell 6.6%
18 Lloyds 6.6%
19 BHP Group 6.6%
20 ITV 6.5%
21 SSE 6.4%
22 Glencore 6.3%
23 WPP 6.3%
24 Barclays 6.1%
25 Admiral Group 6.1%
26 IAG 6%

Careful now!

However, before you grab your chequebook and rush in like a bull in the proverbial china shop, AJ Bell’s report suggests that everything may not be quite as peachy as it first seems.

Those 26 firms may be packing eye-popping yields, sure, but predicted dividends for the 6%-plus yields are covered just 1.56 times by projected earnings. And for the FTSE 100 as a whole the picture is not much better with a reading of 1.63 times, the lowest level for five years. Only Lloyds has a reading of above the widely-accepted safety benchmark of 2 times and above.

Dividend cover is not the be-all-and-end-all when it comes to considering payout security, though, and there’s plenty of shares I’d still buy on that list despite that lack of conventional security. Indeed, I myself own Barratt and Taylor Wimpey on account of their impressive balance sheets, which make up for the lack of earnings protection.

But with a number of high-profile FTSE 100 shares having already cut dividends in 2019 (I’m looking at you Vodafone, Centrica, and the then-Footsie-listed Marks & Spencer), it clearly pays for investors to do their homework and not just be seduced by big yields when hunting for income.

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Royston Wild owns shares of Barratt Developments and Taylor Wimpey. The Motley Fool UK has recommended Admiral Group, Barclays, HSBC Holdings, Imperial Brands, ITV, and Lloyds Banking 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 2019