Five 8%+ high yield dividend shares I’d buy for 2022

Our writer picks out five shares that each yield 8% or more. He explains why he would consider adding them to his portfolio going into 2022.

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Lately I’ve been thinking about my passive income streams for 2022 and beyond. Right now I see some high yield dividend shares whose price makes me want to add them to my portfolio. Here are five such companies, each yielding 8% or more. I’d happily consider buying them for my investment holdings this month and hold them across 2022 and beyond.

Diversified Energy

I recently opened a position in Diversified Energy (LSE: DEC), a significant reason for which was its dividend yield. Currently, the energy well operator yields around 11.0%, which I find very attractive. On top of that, it has raised its dividend annually over the past several years, although that is not necessarily an indicator of future dividend levels. Another attraction from a passive income perspective is that Diversified pays out quarterly.

But an 11% yield is unusually high – could that be a warning signal for potential risks with the share? I do see a number of risks in owning Diversified. Falling energy prices could hurt profits. Shifts in the energy demand mix could lead to declining revenues. There is also the clean-up cost associated with the company’s thousands of aging wells. Such costs could hurt profits in coming years. Recognising these risks, however, I continue to find Diversified compelling enough to have bought it for my portfolio as we head towards 2022. Its large, growing portfolio of energy wells should keep it pumping oil and gas for many years to come. I expect there will still be demand for such energy even as alternative sources become more popular. Growing overall energy demand should benefit Diversified despite its heavy reliance on oil and gas.

Direct Line

A well-known brand can be helpful for a company’s prospects. It can give it pricing power, allowing it to attract customers and earn attractive profit margins rather than being forced simply to compete on price. With the increasing price visibility brought to the insurance market by online comparison sites, I think that has become especially true for insurers. One insurer I think benefits from a strong brand is Direct Line (LSE: DLG).

Its pricing power isn’t the only thing I like about Direct Line from an investment perspective. It is also a generous dividend payer. Direct Line shares currently offer a prospective yield of 8.0%. I’d be happy to add Direct Line to my portfolio for 2022 and beyond. But I do see some risks here. For example, the rising cost of used vehicles could push up the company’s claim settlement costs. That might lower profits.

Income and Growth Trust

I wrote about venture capital trust Income & Growth (LSE: IGV) last month in a rundown of double-digit yielding dividend shares I was considering for my portfolio. I noted then that it had paid out 5p per share so far this year in dividends, but further payments were as yet unknown. Last week, the trust declared an additional 4p per share interim dividend. That means that, so far this year, it has declared 9p of dividends per share. With its trading price around 91p at the time of writing this article yesterday, that means that this year’s yield from the shares is almost 10% even without any final dividend yet being declared.

Last year’s payout per share totalled 14p and the year before that it was 6p. So the dividend can move around a lot. But the trust’s track record shows that it has been able to generate funds for significant dividend payments. It does that through investing in a portfolio of young companies and hopefully benefitting from their growth. Such an approach can bring risks as well as rewards, though. If the trust manager chooses promising companies that then fail to blossom, its profitability could suffer.

Imperial Brands

I hold both of the two main UK-based tobacco companies in my portfolio, British American Tobacco and Imperial Brands (LSE: IMB). Both benefit from the rich cash generation characteristics of the tobacco business. Production costs are low and the companies have strong pricing power, which can help fund large dividends.

BAT’s trading update this week was well-received by the market. The shares have moved up over the past few days. Its yield of 7.9% still looks attractive to me, but right now I’d happily add more Imperial to my portfolio. It currently yields 8.8%.

Imperial has scaled back its ambitions in so-called next generation products, which are cigarette alternatives like vaping. I think that could be both good and bad for the shares. The good aspect is that it saves Imperial from spending heavily to build market share in an area which isn’t yet strongly profitable like cigarettes. But the bad part is that it could mean Imperial becomes more dependent than competitors on cigarettes. Cigarette demand is declining in many markets. Imperial is trying to combat that with price increases and increased marketing to grow its market share. But long term, its cigarette focus could be a risk to revenues and profits. Meanwhile, though, I reckon it could keep making large profits from cigarettes for years or decades to come.

M&G

Another of the high yield dividend shares I would consider adding to my portfolio for next year is financial services firm M&G (LSE:MNG).

Like Direct Line, the company benefits from a strong brand. I also like the economic characteristics of the investment management business in which it operates. The size of many customers’ investments means that even with a modest commission, M&G should be able to earn a handsome profit. Last year, for example, the company reported a post-tax profit of £1.1bn. That compares to its current market capitalisation of £5.1bn, putting the M&G share price on an attractive valuation for me.

Such profitability can translate into chunky dividends. Currently the shares offer a 9.3% yield. M&G is committed to maintaining or raising its dividend, although of course if it runs into unexpected business headwinds that could change. One such headwind could be increased competition in financial services driving down profit margins.

5 high yield dividend shares

With each of these shares yielding 8% or more, I’d pay particular attention on risk as well as potential reward. Do the yields reflect some hidden danger?

I simply can’t know — that’s the nature of a hidden danger. That is exactly why I seek to reduce my risk by diversifying across different shares when I add to my portfolio. I’d happily hold all five of these shares in my portfolio together.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in British American Tobacco, Diversified Energy Company and Imperial Brands. The Motley Fool UK has recommended British American Tobacco and 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.

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