Are the FTSE 100’s top income stocks a bargain?

The FTSE 100 is renowned for its value and dividend stocks. So, are the index’s top income stocks worth a bargain?

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Key Points

  • The FTSE 100's top dividend payer may not be able to sustain its high pay outs.
  • As the housing market cools, this housing stock is expected to decrease its dividend.
  • Smokers are not quitting anytime soon, so this stock is expected to continue paying a high dividend income.

The UK’s FTSE 100 is renowned for its portfolio of blue-chip stocks. The index has an average dividend yield of almost 4%, with some dividend stocks boasting yields of 8%-10% on the upper end. With the index in the red this year, there’s room for me to buy the FTSE 100’s top income stocks for a bargain.

High yields are a commodity

Rio Tinto (LSE: RIO) has the FTSE 100’s highest dividend yield of 11%, paying investors approximately £3.07 per share. It’s also worth noting that the mining firm had a stellar 2021, allowing it to pay a special dividend of around £0.46 per share. This brings Rio’s total dividend to £3.53 per share, with its share price also up 8% this year!

While high dividends are attractive, it’s not always sustainable. This tends to be the case with mining companies as they operate in economic cycles. Given that the global economy is expected to slow down this year, Rio’s top line is expecting some bruising. Additionally, China, its biggest customer, still has city-wide lockdowns in place to eradicate Covid. This has halted many construction projects and demand for iron ore. Therefore, I am doubtful that the blue-chip stock can continue generating a high level of passive income for investors.

Bricks and mortar

Persimmon (LSE: PSN) is not historically known for paying a high dividend. Its current dividend yield of 11% is only so high due to its share price plunging 25% this year. That’s because as share prices decrease, yields go up as a result. Nonetheless, the company is expected to pay a dividend of £1.10 per share, down £0.15 from its previous payment.

The reason for this is the firm’s decreasing margins. Its initial dividend of 11% was not well covered by earnings nor forecasts to begin with. Not to mention, higher interest rates are expected to slow the demand for houses. This would have an impact on Persimmon’s sales revenue. Combine that with rising material costs and the FTSE 100 housing giant doesn’t have as much cash to hand out to investors. However, its ex-dividend date is in a month’s time, and could present an opportunity for me to make some passive income on a bargain.

An Imperial dividend

The Imperial Brands (LSE: IMB) share price is up 3% this year due to its defensive nature. Pair that with a dividend yield of 8%, and this stock has been a great asset for investors this year.

The tobacco firm released a positive trading update last month. Smokers do not seem to be quitting in a hurry, and its next generation products showed positive results. This indicates that there may be a future for the company when or if cigarettes die out. Management also mentioned that the firm is in line to meet expectations when it reports its half-year results.

We (expect) full-year net revenue growth of around 0-1% on a constant currency basis and adjusted operating profit growth of around 1%.

Source: Imperial Brands Pre-Close 2022 Trading Update

For that reason, Imperial Brands is likely to continue handing out a healthy dividend as one of the index’s best income stocks.

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.

John Choong has no position in any of the shares mentioned at the time of writing. 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.

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