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Three 6%+ yielding FTSE 100 UK shares I’d pick today

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Christopher Ruane
·3-min read
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Adult woman holding a finger on her lips over white background
Adult woman holding a finger on her lips over white background

Hunting for yield can get harder when stock markets start to rise. But right now, a number of UK shares offer yields in the mid to high single digits I find attractive.

Not only that, these include some FTSE 100 constituents. Here are three such 6%-plus yielders from the FTSE 100 I’d consider buying today.

UK shares increase dividend

Shares in financial services provider M&G (LSE: MNG) have increased 37% over the past year. Yet M&G still offers an 8.9% yield.

Previously part of Prudential, M&G only has a short track record as an independent listed company. I think that means some investors may be struggling to value it and also wondering how sustainable the yield is.

Last year’s 18.23p dividend was covered more than twice over from earnings. The prior year’s earning coverage was even stronger. I also took it as a good sign that management announced this month that the final dividend for last year would be increased.

The increase was small – around 2% – but it still suggests that the board has confidence in the company’s prospects. Financial services results can be hit by the economic cycle, so future results may not be as good.

More than cigarettes

Tobacco companies tend to be highly cash generative. That makes them favourites for many dividend hunters, though some investors shun them on ethical grounds.

One of the key attractions to me in British American Tobacco (LSE: BATS) is its portfolio of iconic cigarette brands such as Lucky Strike and Rothmans. Cigarettes can be highly profitable because they aren’t very expensive to make but smokers are often willing to pay a premium for them.

However, with tobacco use declining in many markets, the cash generation machine of cigarettes may decline in years to come. Interestingly, BAT has been expanding into new business areas in recent years. It added 3m consumers to its non-combustible products last year and says it is on track for 50m by 2030. That strategy could help compensate for future losses of cigarette smokers. But high development costs and lower profit margins could make them less attractive than today’s business.

I also don’t like the company’s £39bn of adjusted net debt. So I was happy to see it fall by 5% last year. Meanwhile, last year profit from operations grew in double digits.

BAT raised its dividend again last month. The UK shares now yield 7.6%.

Boring but profitable

As cigarettes show, attractive income streams often don’t need a new idea.

Take insurance as an example. It’s an old industry. The basic principles have hardly changed. That enables companies to apply them effectively. Legal and General (LSE: LNG) was set up in 1836. Its deep expertise in insurance and strong brand name help give it an advantage in the UK market.

But Legal & General is not just an insurer. Under its colourful umbrella sits a sizeable financial services business. It provides services such as pensions and capital investment. These could help grow the business when insurance enters one of its cyclical downturns, though they do add financial complexity.

Its established position has helped its UK shares pay out a dividend each year since before the turn of the century. It continued to pay during the pandemic and financial crisis. That sort of consistency appeals to me, although it is not guaranteed in the future. Currently the shares yield 6.4%.

The post Three 6%+ yielding FTSE 100 UK shares I’d pick today appeared first on The Motley Fool UK.

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christopherruane owns shares of British American Tobacco. The Motley Fool UK has recommended Prudential. 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