It’s not often that investors can choose from a range of good quality large businesses with dividend yields of 6% or more.
But I estimate that around 16 companies in the FTSE 100 have forecast yields of at least that at the moment. In my view, many of these should be sustainable.
Today I’m looking at two stocks from my own portfolio with yield of about 6%. I believe both are likely to deliver attractive cash returns for shareholders over the next few years.
Don’t let this blooper put you off
Insurance group Aviva (LSE: AV) recently suffered some bad press when it announced plans to buy back and cancel preference shares that investors had believed couldn’t be cancelled.
The legal validity of this plan wasn’t tested in the end as the company decided not to proceed. But the firm could still face claims for compensation from investors who sold their shares when the plan was originally announced and might now have to pay more to buy them back.
It’s an unfortunate episode, but in my experience bloopers like this rarely have much impact on a company’s financial performance or its share price. I think that investors looking for income will still be attracted by Aviva’s strong cash generation – and by its well supported dividend yield of 6%.
I’ve bought more
I recently added more Aviva shares to my own income portfolio. Although my Foolish colleague Kevin Godbold believes that the stock’s high yield and low forecast P/E of 8.8 indicate that earnings could be at a cyclical peak, I don’t think that’s the case.
Last year saw solid improvements in all areas. The group’s Solvency II cover — a regulatory measure of surplus capital — rose from 189% to 198%. Net asset value per share also rose from 414p to 423p. And cash remittances rose by 33% to £2,398m.
More of the same is expected this year as the group focuses on growth in markets where it has profitable scale. In the meantime, chief executive Mark Wilson plans to use £2bn of spare cash to reduce debt, fund additional shareholder returns and make acquisitions.
I continue to rate the shares as a buy.
Mining for cash
Anglo-Australian mining group Rio Tinto (LSE: RIO) recently became the first of the big miners to make a complete exit from the coal market. This process came to a close in March with a flurry of deals that should net the firm $4.15bn.
A couple of years ago this cash would have been used to reduce debt. But that process is already complete — the group ended 2017 with net debt of just $3.6bn. Set alongside last year’s after-tax profit of $8.7bn, this level of borrowing is insignificant.
Focus on shareholders
This windfall means that Rio boss Jean-Sebastien Jacques could spend heavily on new mine projects or make acquisitions. But investor appetite for aggressive growth is limited. Most analysts expect Jacques to return at least some of this cash to shareholders, either through buybacks or additional dividends.
Rio’s operating profit margin rose from 19% to 34% last year, thanks to a mix of cost cutting and stronger commodity prices. This may not be sustainable, but with the shares trading on a forecast P/E of 10 with an expected yield of 6%, I think the risk is worth taking and would still be happy to buy.
