The average dividend yield for the FTSE 100 is now nudging 5%. That’s much higher than just a few weeks ago and is a result of the recent coronavirus-led market crash.
It’s important to remember that not all high yields are equal. Some companies will pay a high yield because the shares are really in trouble and may well keep falling. This is likely the case at, say, Marks & Spencer. For other shares, though, a high yield is just good for investors.
Making cash from a greying population
Asset manager and insurer Legal & General (LSE: LGEN) is one company in this latter group. It has for many years had a higher than average dividend yield – likely because it operates in very profitable, cash generative and growing sectors.
The yield now is around 7% which is towards the top of the range it’s tended to be in during the last three or four years. It’s often fluctuating between around 5.5% to 7.5%, depending on the share price. A falling share price – due to fears around coronavirus – explains the recent spike in the yield.
Focusing on asset management and providing retirement solutions including bulk annuities has seen the group perform well financially. Just this month it revealed full-year operating profit rose 12% year-on-year to £2.1bn. Growth was spread across all divisions which is good for investors.
There’s growing demand for annuities and a huge potential market for Legal & General to grow into, so there’s plenty more money to be made both in the UK and in North America.
With a price-to-earnings ratio now below nine I think shares in Legal & General are looking great value. There’s potential for share price growth alongside a very generous dividend.
Sticking with investment banking
Another financial company with an eye-watering yield is Barclays (LSE: BARC). The shares yield 6.5%. In recent years growth in the dividend has been strong and there’s potential for this to continue because dividend cover is comfortably above one.
The shares at the moment trade on a forward P/E ratio of six. Any reading around or below 10 times is widely considered to be in ‘bargain basement’ territory.
Showing the group is doing well financially, full-year results out last month beat market forecasts for profit, revenue, and return on tangible equity, a key measure of banking performance. Revenue at Barclays rose 2% to £21.6bn ($28bn) in 2019, slightly above market forecasts of £21.5bn. Pre-tax profit rose 9% to £6.2bn, against analyst expectations of £6bn.
The bank continued to make headway with its investment banking activities – something CEO Jes Staley has been keen to keep despite activist investor pressure. Income at the investment and corporate banking division rose by 5% to £10.2bn and pre-tax profit rose 15% to £3.1bn during the last full year.
Sure, Barclays’s shares could be held back by fears over coronavirus, the likely soon departure of the CEO, and possible further interest rate cuts, but the recent results show the bank is in great shape. Therefore, I think the shares look cheap right now.
