Plenty of FTSE 100 companies offer sky-high dividend yields right now of up to 6% or 7%, but these heady returns are often a sign of trouble and leaves them vulnerable to a cut.
Last year, Tesco trashed its dividend by 75%, and WM Morrison announced a 63% cut in March. Here are five FTSE 100 favourites on juicy yields, but will their pips also start to squeak?
Glaxo could go
GlaxoSmithKline (LSE: GSK) currently yields 6.08%, an incredible return from one of the most solid UK dividend payers. There were no signs of dividend concerns in its recent half-yearly report, with 19p declared for Q2, and continued expectation of a full-year dividend of 80p. Management also intends to pay 80p in 2016 and 2017 as well.
Glaxo also plans to hand shareholders approximately £1 billion, or 20p per share, via a special dividend to be paid alongside its Q4 2015 ordinary dividend payment. Management generosity should be a good sign, but there are concerns. The dividend is covered just 1.2 times, which is pretty thin. Another worry is that free cash flow has taken a temporary knock this year, following the disposals of Glaxo’s oncology business and Aspen investments. The dividend looks safe for now, but could come under question if Glaxo’s sales falter.
HSBC holding on
HSBC Holdings (LSE: HSBA) yields an even more generous 6.20%, helped by a 20% drop in its share price over the last 12 months. Better still, this is covered at least 1.6 times in each of the next three years and its balance sheet looks strong too. In the short run, continuing Chinese easing should sustain HSBC, which earns 70% of its profits from the region. But if China does crash into a hard landing, HSBC’s dividend investors could get burned.
Royal Dutch shells out
Royal Dutch Shell (LSE: RDS) is wedded to its dividend, which, unlike BP, it hasn’t cut since the Second World War. No manager will want to be the first to break that record, but with the share price down 35% in the last year, forcing the yield up to 7.14%, somebody might have to bite the bullet. Right now, it is covered 1.6 times, but City analysts reckon that will shrink to as little as 1.1 times, which is starting to look threadbare. The good news is that Shell continues to pump out the cash and management is committed to paying this year’s full-year $1.88 divi into 2016 at least. Thereafter, it all depends on the oil price.
Our friend electric
SSE (LSE: SSE) has lifted its dividend every year since 1992, at a compound annual rate of 10%, but maintaining this proud record could be getting harder as profits come under pressure, notably in its non-regulated wholesale and retail arms. Earnings per share look set to fall to 115p this year, down from 124.1p, and cash flow will be knocked by its obligations to invest in UK infrastructure.
SSE aims for 1.5 times dividend cover but that is slipping perilously towards 1.2. Cost savings and asset sell-offs may protect it for a while, but it needs to get on with the hard work of boosting earnings. Today’s 6.06% is electric, but could quickly lose its sizzle.
Standard trouble
Standard Chartered (LSE: STAN) is another FTSE 100 company forced to bite the dividend bullet, along with Tesco and WMR Morrison. In August, plunging profits force management to slash the yield in half, leaving it on a forecast 4.4%. At least that will be covered two times, giving more security going forwards. Standard Chartered may offer the lowest yield of these five stocks, but at least it is safe… for now.
