For income investors, the dividend yield is often the deciding factor when choosing a stock, but it can be a deceptive beast.
Very high dividend yields can be a warning beacon that the company is attempting to deflect attention from its problems. Whereas a very low dividend yield can cause potential investors to miss out on great opportunities if they write them off as a no-go.
The following companies offer some of the highest yields in the FTSE 100, but the question is, are they a good investment?
Risk vs reward
Global steel and mining company Evraz (LSE:EVR) has a dividend yield of 14.3% and its financial metrics are enticing. It has a £5bn market cap, a price-to-earnings ratio (P/E) of 3, earnings per share of £1.10 and that monster dividend.
However, mining companies are notoriously risky investments. They’re also out of favour for the damage they’re doing to the planet.
So, is Evraz worth the risk? It’s had a bumpy ride over the past year and its share price is down 42% in the past six months. One reason being that its chairman and major shareholders sold millions of shares without explanation.
In its fourth-quarter trading update, it told us that consolidated crude steel production climbed 6.1% year-on-year, but external iron ore product sales fell 42.5% during 2019. It simply looks too risky for me, but I can see the appeal for those that don’t mind a roll of the dice.
Unholy bargain
Consumer defensive tobacco giant Imperial Brands (LSE:IMB) has a forward dividend yield of 14.9%
The Imperial brands share price is down 20% in the past year and being a tobacco stock, it’s not one for ethical investors. It has an £18bn market cap, P/E of 18 and EPS of £1.05.
With its ‘sin stock’ status aside, this high-yielding FTSE 100 dividend share has its forecast dividend payment covered by its cash flow, which means I’m less inclined to think it will be at risk of a cut.
The tobacco industry has been shaken up in recent years. Big names sidestepped into vaping products to offset losses from declining cigarette volumes and Imperial Brands has its own next-generation products (NGP).
But regulatory tightening remains a concern, although having established itself in the arena, it’s well placed to scale up when regulations are clearer.
A large part of IMB’s portfolio contains cigarette, rolling paper and tobacco brands. Along with its NGP portfolio, it’s positioned to deliver sustained profitable growth. Considering its high dividend yield, I think this could be a bargain Buy.
Mounting costs
The BT Group (LSE:BT-A) share price has taken a hammering in recent years. I looked at it last month and considered it a Buy due to BT’s cybersecurity knowledge. I still think this could be its secret weapon, but have lost confidence in its ability to rein-in costs.
The UK government recently allowed Huawei to supply parts of the UK’s new 5G networks. The process also banned high-risk kit in use, which BT estimates will cost £500m to replace with approved components.
BT Group has a P/E of 7 and a dividend yield of 8.6%, but many analysts think this yield is unsustainable. Given the group’s significant debt and pension deficit, along with the unknown costs it’s likely to incur in the 5G rollout, I agree a rate cut is likely on the cards. I won’t be buying.
