The FTSE 100 has an average dividend yield of 3.5%. That’s okay, but as an income investor, I want a yield above the market average. Fortunately, the UK market’s still quite a good place to hunt for high dividend yield stocks.
Today, I’m going to look at three big dividends I’ve been buying for my portfolio. But before I start, I should point out that high yields can be a sign that a cut is likely. To try and avoid this, I look carefully at companies’ cash flows to see how sustainable their payouts might be.
A safe 9% yield?
FTSE 100 tobacco group Imperial Brands (LSE: IMB) currently offers a 9% dividend yield. I don’t think this payout’s likely to be cut for the foreseeable future. Indeed, I think it’s possible that the payout will slowly increase, driven by reliable sales of brands such as JPS, West and Gauloises.
Since taking charge in July 2020, CEO Stefan Bomhard has dialled back Imperial’s efforts to diversify and is focusing on its core tobacco business. This may seem odd, as tobacco obviously isn’t a growth market. Smoking rates in most markets continue to decline.
However, Imperial still has a large, profitable business. I agree with Bomhard’s approach. In my view, maximising the profitability of its main business is a sensible strategy. At least for now.
Tobacco firms will always face risks from declining demand and tougher health regulations, but this 9% dividend yield looks safe enough to me.
A golden opportunity?
My next dividend stock pick is FTSE 100 gold miner Polymetal International (LSE: POLY). I’m not generally a gold investor, but I like the safe haven appeal of the yellow metal. As we saw last year, the price of gold often rises during a crisis.
Polymetal has a well-established track record on the London market. It’s also a relatively low-cost producer, with expected all-in costs of around $950 per ounce this year. The price of gold hasn’t dropped below $1,000 for more than 10 years, so that seems like a safe level of profitability to me.
Polymetal shares currently offer a forecast yield of 7.4%. This payout looks safe enough at the moment. But, of course, future dividends will depend on the gold price. A sudden slump could trigger a cut to shareholder payouts.
Even so, I think Polymetal shares offer decent value at this level. I’ve been buying the shares for my portfolio.
A FTSE 250 dividend stock yielding 8%
The income share I want to look at is FTSE 250 insurer Direct Line Insurance (LSE: DLG). Direct Line’s the group’s best-known consumer brand, but it also owns others, including Churchill, Green Flag and Privilege.
Direct Line has struggled to grow in a competitive UK market in recent years, but has maintained its strong profitability and good cash generation.
CEO Penny James has now completed a programme of technology upgrades that should help improve pricing and profitability. Market conditions are also said to be improving, so I’m hopeful the business will return to growth.
The big risk is that Direct Line’s big dividends are a sign the company can’t deploy cash profitably in new business. If this doesn’t change, the business (and the share price) could gradually shrink.
I don’t think this is likely. I’m happy to hold Direct Line and would keep buying at this level.
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Roland Head owns shares of Direct Line Insurance, Imperial Brands, and Polymetal International. The Motley Fool UK has recommended Imperial Brands. 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.