As a veteran value investor, I’m always looking out for cheap stocks and shares. In particular, I try to track down shares that pay generous dividends to shareholders. Dividends are regular cash payments paid to shareholders by companies, usually half-yearly or quarterly. For me, share dividends are the closest thing to free money I’ve ever had. And as American business tycoon John D Rockefeller once remarked: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” What’s more, reinvested dividends can account for roughly half of the long-term returns from UK shares. Here are 10 FTSE 100 shares that pay bumper cash dividends to patient shareholders.
10 huge FTSE 100 dividends
On Friday, the FTSE 100 closed at 7,122.32 points. At this level, the index has a forecast dividend yield of 4.1% for 2021. However, at least 12 FTSE 100 stocks don’t pay dividends to shareholders. Also, dividend yields vary widely across the remaining 89 Footsie shares (one company has a dual listing).
The good news is that some large FTSE 100 firms pay generous dividends to shareholders. Indeed, I count at least 17 Footsie stocks with dividend yields of 5%+ a year. Here are 10 stocks that I don’t own today that pay some of the highest dividend yields in the London Stock Exchange.
|British American Tobacco||Tobacco||8.4%|
|Legal & General||Financial||6.2%|
As you can see, dividend yields at these 10 FTSE 100 firms range from 13% a year at global steelmaker and miner Evraz to 6.2% a year at Legal & General. What’s more, two other mining stocks offer double-digit dividend yields (10.8% at Rio Tinto and 10.7% a year at BHP Group).
Across all 10 high-yielding shares, the average dividend yield is 9% a year. In other words, if I invested £1,000 into each stock, I could expect yearly dividends of £900 as long as that rate was maintained. Not bad, given we live in a world of ultra-low and negative interest rates. After all, the dividend yields on offer are market-beating right across the board. But I wouldn’t build an entire portfolio from just these 10 FTSE 100 stocks. Why?
Now for the bad news
First, a portfolio consisting of only these 10 FTSE 100 shares would be highly concentrated. Four members are miners, two are tobacco companies, two are financial firms and the two remaining stocks are housebuilder Persimmon and telecoms giant Vodafone. For me, this portfolio wouldn’t be diversified enough, so I’d consider it far too risky.
Second, I would expect such a portfolio to be rather volatile. Metals prices and mining stocks are notoriously volatile, which could generate wild swings in the portfolio’s value. Likewise, tobacco stocks sometimes fall out of favour, as do financial shares. Third, share dividends aren’t guaranteed, so they can be cut or cancelled at any time. Indeed, from the list above, Rio Tinto cut its dividend in 2016, BHP did so in 2016 and 2020, while Evraz cut in 2012, 2013, 2014 and 2020. And many FTSE 100 companies withdrew dividends in Covid-hit 2020.
Nevertheless, were I to start buying more high-yielding stocks, these FTSE 100 shares would be prime candidates on my list today. As I said earlier, there’s nothing quite like getting free money from dividends!