The Motley Fool

How I’d invest £1,000 in ultra-high-yield dividend stocks right now

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

British bank notes and coins
Image source: Getty Images

There’s an expression used to refer to stocks with a dividend yield in excess of what traditional investors expect. Such stocks are referred to as ultra-high-yield. If I had £1,000 that I wanted to put into income-paying stocks, here’s how (and where) I’d look to invest. Would I buy very high yielders?

Noting more ultra-high-yield stocks

The FTSE 100 average dividend yield has risen over the course of this year. It now sits around 3.5%. One reason for this in the short run is the FTSE 100 stalling, despite companies reestablishing or increasing their dividends per share. This has helped to create ultra-high-yield stocks.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

For example, over the past few months, the FTSE 100 hasn’t really made any gains and has been ranging between 6,800 and 7,200 points. So the share price for an average constituent has also remained fairly flat. 

At the same time, most sectors have seen a much better 2021 in comparison to a pandemic-hit 2020. Some companies have increased the dividend per share payout to reflect this in mid-year results. So if the share price is the same but the dividend per share has increased, the overall dividend yield goes up.

Alternatively, some firms have kept the dividend payout the same, but have seen a falling share price over the summer. This too can create ultra-high-yield stocks, but arguably not the best ones for me to consider buying with £1,000!

Being careful when picking stocks

Personally, before I’d buy any ultra-high-yield stocks, I want to know why the yield has increased. Ideally, the best kind to buy are those that are seeing a rising share price, but a much larger rise in the dividend per share. This would increase the yield, but at the same time show that the company is performing well.

The issue with some stocks that have seen yields creeping up to 8%, 9% or even 10%+ is that the outlook might not be great.

For example, the Rio Tinto dividend yield has risen over the course of the summer and now sits above 10%. That has come as the share price has fallen almost 20% over the past three months. Concerns over a slowdown in China have seen commodity prices fall. As a mining stock, this has directly impacted the business. I’m not sure the outlook is that positive going into next year. This might see the dividend per share cut, making this ultra-high-yield dividend stock’s payout potentially unsustainable.

By doing some research, I can find good value though. For example, the SSE share price is up 7% over the past three months. Yet it also has a dividend yield of 5%. Granted, this isn’t an ultra-high-yield stock in the same way as Rio Tinto, but I think the recent performance shows more promise.

Diversifying to lower my risk

I’d split my £1,000 and invest in half a dozen dividend stocks. I’d pick a couple ultra-high-yield stocks, that I’d classify as higher-risk. For the other three or four shares, I’d lower my yield and buy lower-risk stocks in the 5%-6% yield bucket.

Overall, I think this could help me to benefit from the income payouts of high-yielders, but at the same time reduce the risk inherent in high-yield stocks going forward.

Our #1 North American Stock For The ‘New-Age Space Race’

Billionaires like Jeff Bezos, Bill Gates, Elon Musk, and Mark Zuckerberg are already betting big money on the ‘new-age space race’, and for one very good reason…

…because this is an industry that according to Morgan Stanley could be worth $1 TRILLION by 2040.

But the problem is most of their investments are in private companies — meaning they’re largely off-limits for everyday investors.

Fortunately, our team of analysts have identified one little-known company that’s at the cutting-edge of the space industry, and is currently trading at what looks like a VERY reasonable valuation

for now.

That’s why I want to urge you to check out our premium research on this top North American space stock ASAP.

Simply click here to see find out how you can grab your copy today

jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.