Research consistently shows that dividends are a fantastic way of growing wealth. That’s because investors can take the income and reinvest it in buying more shares, so that, year after year, they get bigger dividend payments. It’s a virtuous, wealth-enhancing cycle. That’s why I’m highlighting two high-yielding FTSE 100 shares that I think have the potential to keep growing.
Big challenges
The advertising giant WPP (LSE: WPP) combines a cheap share price with a massive dividend yield. The shares are trading on a price-to-earnings ratio of 7, while the dividend yield is 6.2% – well above the FTSE 100 average of 4.3%.
The reasons for the share price being cheap are complicated, but the company was hit by a combination of factors, including the departure of WPP’s founder, client losses, and fears of Google and Facebook dominating online advertising.
Then there’s also always going to be the cyclical nature of the advertising business – companies cut expenditure when there are fears of an economic slowdown. However, recently the share price has started to recover.
Over the last 12 months it has risen by 20%. WPP’s strategy of selling off non-core assets, such as a majority stake in sports marketing agency Two Circles, and reducing debt by selling most of Kantar, its data, research, consulting, and analytics business, are all helping the business and shareholders. WPP is also investing in technology and data to increase its competitiveness in the digital space.
WPP is landing new clients such as eBay and Mondelez. It’s also starting to return to growth and, should this trend continue, I expect the share price and the dividend to keep on growing.
Poor building
Housebuilder Persimmon (LSE: PSN) had a dividend yield of over 7.5%. It’s another share that combines a very generous yield with a cheap share price – the P/E is only around 11. And that’s even after the share price has accelerated since December’s general election.
The share price has been struggling because, after years of poor building quality, the group has had to introduce costly initiatives to win back customers. In the short term this is hitting the bottom line, but longer term, I think Persimmon will emerge stronger, just like other housebuilders that have gone through similar pain.
The group has very strong margins, at around the 30% mark. It has a large land bank on which to build future developments and a strong balance sheet – something that has been a focus since the recession started over a decade ago. At the end of 2019, PSN had £844m of cash.
With Help to Buy still boosting Persimmon’s profits and the housing market now rising at its fastest rate since early 2018, the signs are good for the shares to keep going up. Especially given the yield on offer and the fact the shares are still going cheap.
Both these shares are very much reliant on a strong economy – but then many shares in the FTSE 100 are. They are cyclical, but right now their share prices are rising and I think they have further to rise over the coming years.
