Dividend stocks have become very popular in recent years. With interest rates on savings accounts at rock-bottom lows, many people have turned to dividend stocks for income.
One thing investors often want to know is which stocks have the highest dividend yields. With that in mind, I thought I’d take a look at the highest-yielding shares in the FTSE 100 index right now.
Which FTSE 100 shares have the highest dividends?
To find out which FTSE 100 stocks have the highest yields at present, I sorted all of the stocks in the Footsie by their ‘rolling’ forward-looking dividend yields, using Stockopedia. Using a rolling yield is useful because every company has a different date for the end of their financial year. Looking at yield on a rolling basis provides a standardised measure of yield. I’ve listed the 10 highest-yielding stocks in the FTSE 100 below.
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Source: Stockopedia. Data as of 27 May 2021
There are few things to understand about this list of high-yield stocks. First, dividend yields are constantly fluctuating as share prices move. The data above is accurate as of 27 May. Already, the yields will have changed. Second, some of these yields include ‘special’ one-off dividends.
Third, and this is important, dividends are never guaranteed. Companies can reduce, suspend, or cut their dividends at any time. Mining companies, in particular, have a habit of reducing their dividends when their profits fall. The data above is based on analysts’ estimates and these estimates can be way off the mark at times.
What to understand about high-yielding stocks
It’s also worth pointing out that, quite often, high-yielding stocks are not good long-term investments.
Often, a high yield is actually a sign that the company is experiencing challenges. What has happened is that smart investors have already sold the stock, pushing its share price down and its dividend yield up.
When companies are experiencing challenges, they often cut their dividends to conserve cash. This can hurt investors. Not only do investors face a lower level of income but they also tend to be hit with further share price falls.
This scenario is known as a ‘dividend trap’. Investors buy the stock because of its attractive high yield, but the yield is not sustainable and they end up getting hurt.
The best dividend shares
Ultimately, there’s a lot more to investing in dividend stocks than just looking for a high yield. It’s also important to look at:
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A company’s growth prospects – growth leads to higher profits which, in turn, leads to higher dividends.
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A company’s dividend coverage. This is the ratio of earnings to dividends. A high ratio means the dividend is more likely to be sustainable.
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A company’s balance sheet. Companies with a lot of debt sometimes cut their dividends so they can pay their interest.
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The stability of earnings. Companies that are highly ‘cyclical’ like miners and banks often cut their dividends.
The best dividend stocks tend to have stable earnings, strong growth prospects, and healthy balance sheets. These stocks might not have the highest yields. But over time, they tend to provide strong long-term total returns (dividends and capital gains) for investors.
