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3 UK dividend shares that could pay me a yield above 6%

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I’m always on the lookout for ways to make my money work harder than it already does. So if my UK dividend shares are giving me a yield of 3%, then I’ve got one eye on other stocks that are offering higher yields.

I need to be careful, as dividend yields change all the time and I could get caught out by switching. Also, yields aren’t everything as a high yield can be a danger sign, while The Motley Fool way is to buy and hold for the long term.

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But recently, several shares with yields above 6% have caught my eye. In a low-interest-rate environment, this is worth looking into.

Stock options within finance

One industry that holds opportunities for me is financial services. Two examples are Standard Life Aberdeen and M&G, with dividend yields of 6.84% and 9.8% respectively.

Standard Life is an investment management company and is the UK’s largest listed fund manager. M&G operates in a lot of the same areas. Both saw a hit to profitability last year that drove their share prices down, but both also decided to continue with dividend payouts.

The main reason for reduced profits was lower fee-based revenue from the assets held under management (AUM). Due to the stock market crash in March, some investors decided to pull their money from funds and hold it in cash instead.

For example, M&G saw an outflow of client funds amounting to £4.1bn in H1. Even though Standard Life saw a slight inflow during this period, it had to write down the value of goodwill and other asset value, causing an accounting loss. The main risk is that AUM continues to fall in 2021 if we see another stock market crash.

Even with this risk, I think both of the companies could offer me value. The bounce-back in the stock market in the second half of 2020 should reflect inflows in the upcoming full-year results. Both companies also have strong liquidity and the needed regulatory capital levels to ride out another crash. 

Alternative UK dividend shares

I also see other sectors as appealing at the moment. British American Tobacco (LSE: BATS) is a good example. The dividend yield sits at 7.81%. Again, the fact that the share price is down 21% over the past year is one reason why the yield of this dividend share is above average.

I’d be careful here due to the nature of the industry. Even though BATS is aiming for £5bn worth of revenue from “New Category” products such as vapes by 2025, the decline in traditional tobacco products could snowball before then. The business could also be hit following the rise in popularity of ESG investing. A tobacco company is unlikely to be included in any basket representing ethical investing.

If I exclude this and look at the stock purely as a dividend share though, income seems likely to continue. Interest cover on debt is around 7, and the dividend cover itself is around 1.5. Both figures should enable it to be in a strong enough liquidity position to pay out income in the near term.

Overall, there are several UK dividend shares offering yields above 6%. Dividend yields are backward-looking, so I need to remember that these are not guaranteed. If they are maintained, then it offers me good income in the low-interest-rate world.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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