Why this FTSE 100 stock yielding 11% could help you retire early

Roland Head looks closely at a super-high dividend yield from the FTSE 100 (INDEXFTSE:UKX).

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Today I’m looking at two of the highest-yielding stocks you’ll find on the UK market. One of them offers a forecast dividend yield for this year of an astonishing 11%!

If you want to generate a retirement income from your stock portfolio, dividend stocks like this can seem very attractive. But it’s very important to make sure that these payouts are sustainable and are not a warning that problems lie ahead. Let’s take a look.

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An 11% yield. Really?

FTSE 100 mining and steel group Evraz (LSE: EVR) boasts a forecast dividend yield of 11% for 2018. Looking at the group’s performance so far this year, I have no reason to doubt this projected payout.

Cost savings and stronger market prices meant that the group’s earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 65.5% to $1,906m during the first half of this year, compared to the same period last year.

Free cash flow rose by 20% to $661m and the group was able to reduce net debt by $100m to $3.9bn, while still paying out $617m in dividends.

Shareholder dividends paid with respect to the 2018 financial year are expected to total $0.70 per share (about 54p), giving a prospective yield of about 11%.

Buy, sell or hold?

The Evraz share price has risen by 36% so far this year, cementing the company’s place in the FTSE 100.

However, this year’s bumper profits (and dividend) are expected to be a one-off. Analysts expect earnings to fall by 35% to $0.75 per share in 2019. The dividend is expected to fall by a similar amount to $0.41 per share.

These projections put the stock on a forecast price/earnings ratio of 8.4, with a prospective yield of 6.5%. This still seems attractive to me. I think there’s a good chance that Evraz will continue to deliver above-average returns to shareholders.

3 years of 7% dividends

One of the other high-yield stocks on my watch list is claims management firm Redde (LSE: REDD) provides legal services, courtesy cars and other services related to motor insurance claims.

The group was hit by regulatory changes a few years ago, but seems to have adapted successfully to the new rules. Revenue has risen from £204m in 2012/13 to £472m in 2016/17. The group’s 2017/18 results, published on Thursday, showed further progress. Revenue rose by 11.6% to £527m, while the group’s pre-tax profit was 22% higher, at £38.8m.

One of the attractions of this business is that it generates a lot of free cash flow. This allows the company to pay out the majority of earnings in the form of cash dividends. For this reason, Redde shares have offered a dividend yield close to 7% for at least the last three years.

Can this continue?

I’ve been wary about investing in this stock in the past, but I’m increasingly convinced that the group’s business model is sustainable and attractive to investors.

Redde’s performance last year suggests to me that it’s gaining market share, with a 19.3% increase in credit hire cases and more repairs completed.

Analysts expect profits to be fairly flat in 2018/19, putting the stock on a forecast P/E of 14 with a prospective yield of 7.1%. Based on this year’s performance, these estimates seem very reasonable to me. If you’re looking for high-yield dividend stocks, this could be worth a closer look.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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