With around a quarter of all shares in the FTSE 100 yielding 6% or more at the moment, plus many others offering very reliable dividends in the 4% to 6% range, we’re really spoilt for choice when it comes to seeking income from the UK’s top index.
Just as we’re about to enter 2020, here are three exceptionally high yields that I think are worth buying.
Housing
Brexit or no Brexit, I’ve long been a fan of housebuilder shares, and right now I see good buys.
The Taylor Wimpey (LSE: TW) share price is still below it’s highest point of 2015, even though it did get a nice boost from the election result. Fears of a no-deal Brexit have been weighing on housebuilders under the assumption that the economic slump that would almost certainly result would hit demand for new houses.
But the company has enjoyed a stunning five years of earnings growth that have brought strong cash generation, and it’s now in a phase of returning some of the folding stuff to shareholders. As a result, including special payments, dividends are forecast to yield around 9.5% this year and next.
Looking past Brexit, I think the long-term future for housebuilding in the UK is strong, and the only reason I haven’t bought Taylor Wimpey shares is that I already own Persimmon (on a 9% yield).
Weed
The Imperial Brands (LSE: IMB) share price is down 40% in two years, as tobacco is increasingly disliked as an investment.
But with earnings having been holding up, what that’s done is push the shares’ P/E multiple down to under seven, and the already high dividend yield up to a forecast 11.2%. Saying that, EPS was static last year, and this year there’s no growth on the cards, so the rewards tide might be turning a little.
On top of that, Imperial has backed away from its old policy of lifting its dividend by 10% per year and will tie it to earnings instead, so we could even see the dividend falling in the coming years — but there’s plenty of room to still accommodate a big yield.
But to me, the pessimism looks seriously overdone and the shares way too low, even considering the risks. I also think the price has been hurt by the market’s shunning of anything risky of late, and I can see investors coming back to Imperial.
Insurance
The insurance business might be cyclical, but I’ve always like it, and I’m happily taking my dividends from Aviva (LSE: AV).
With the share price having dropped 17% over two years, you can do better than me by buying today, with forecasts indicating a 7.4% yield. Aviva seems to be more out of favour than the sector in general, but why?
In the years following the financial crisis, the focus was on Aviva’s overstretched and weakening balance sheet, and part of the recovery plan was the suspension of the dividend. Back on much sounder financial footing today, Aviva is looking perhaps a bit bloated and lacking direction, and confidence seems to have drifted while the company’s direction is not looking so sharp.
But earnings have still been growing, and the forecast dividend is covered 1.9 times by earnings. I see a good dividend buy, with the shares just too cheap.
