An investment strategy focused on buying the shares of high-yielding companies can be successful. And many investors target big market capitalisations such as stocks in the FTSE 100 index.
Even big FTSE 100 shares carry some risk
Sometimes big Footsie companies appear to be more stable with mature, well-established businesses. However, even big businesses can go into decline causing their share prices to fall. So, one risk we face following a dividend-led strategy is the possibility that shrinking capital values can erode dividend gains due to falling share prices.
I reckon one of the most important things to consider when researching dividend investments is the potential sustainability of dividend payments. Therefore, I’d aim to verify that dividend payments have a long history of support from trading. And I’d look for a decent and consistent record of cash flowing into the underlying business. On top of that, I’d also aim to analyse the potential of a business to keep paying dividends in the years ahead.
So, with all those points in mind, should I buy shares in the following five FTSE 100 shares with yields above 5%?
|
Stock |
Recent share price |
Forward-looking dividend yield |
|
National Grid |
868p |
5.7% |
|
Vodafone |
126p |
6.3% |
|
British American Tobacco |
2,765p |
8% |
|
GlaxoSmithKline |
1,389p |
5.8% |
|
Lloyds Banking |
32p |
5% |
National Grid has a unique monopoly position in Britain’s energy infrastructure. Indeed, the firm runs the system for transmitting electricity and gas long distances up, down and across the country to where it’s needed. And it also operates a regulated energy business in the US.
But one of the risks for investors is that regulatory requirements for capital investment within the business could change in the future. And that could potentially put shareholder dividend payments under pressure. Nevertheless, I’d be tempted to add the stock to my dividend portfolio.
Earnings look set to rebound for Vodafone
Telecoms company Vodafone has a fair bit of debt on its balance sheet, which is something to keep an eye on. Nevertheless, the record of cash flow looks robust and City analysts expect a double-digit percentage rebound in earnings ahead. However, the valuation looks lower than it was three or four years ago. And, on balance, I’m tempted to buy some of the shares to collect the dividend.
Tobacco volumes are in long-term decline. But British American Tobacco continues to enjoy powerful cash flow and has a record of raising the shareholder dividend incrementally. So, I’m tempted by the fat dividend on offer today.
Although growth in earnings remains elusive for pharmaceutical giant GlaxoSmithKline, the cash flow remains strong and the firm keeps paying shareholder dividends. The payments have remained flat for a number of years. And the share price has dropped a fair bit since the beginning of 2020. But I’m tempted by the stock today.
Lloyds Banking operates a cyclical business. And that’s led to a record of volatile earnings, cash flow and shareholder dividends. The share price has also suffered large swings over the past few years. For those reasons, I’m inclined to avoid the share for my long-term portfolio. Although I reckon the company has the potential to deliver decent shareholder gains over a shorter-term holding period.
