I have been looking for UK shares to buy that could offer me an attractive dividend yield. Here are 10 I would consider buying for my portfolio, each with a yield higher than 6%.
Housebuilders
Quite a few listed housebuilders currently have attractive dividend yields. I would consider buying Persimmon with its 10.5% yield and Vistry, which yields 6.5%.
For both of these shares, I think the bull and bear cases are two sides of the same coin. They basically depend on the outlook for new-build home sales. There is clearly a gap between home availability and demand, so I expect buyers to continue purchasing newly-built homes even if there is a deep recession. But what could happen is that selling prices fall — perhaps dramatically. That would be bad for profits at housebuilders and is an ongoing risk to the juicy dividends at both Persimmon and Vistry.
If it does not happen and prices stay at or above their current level, both companies may be able to maintain their dividends. Vistry’s dividend is far more comfortably covered by earnings than that of Persimmon. But both firms are paying out less than they make in profits – for now at least. So if housing prices do not slide, both may continue to offer an attractive dividend funded from profits.
Insurers
The insurance sector is often a rewarding place to hunt for income ideas. The economics of the industry are fairly simple – selling millions of policies at a higher price than it takes to pay out the average claim on them allows insurers to make profits that can help fund dividends.
That can be seen at two well-known names. One is Direct Line, which currently yields 8.8%. The other is Legal & General, yielding 6.8%. They do not write exotic lines of insurance, sticking to more mundane areas like motor and home insurance. That helps bring predictability to their likely returns. There are still risks, such as an increase in the cost of vehicles eating into profits on motor insurance lines. But over the long run, they operate in a market with sustained demand and can benefit from a high level of customer awareness thanks to their iconic brands.
From a growth perspective, I prefer Legal & General as its wider assortment of financial services businesses offers it a number of avenues for expansion. But the notably higher yield at Direct Line makes the shares attractive to me from an income perspective. With yields north of 6%, I see both of them as UK shares to buy now for my portfolio.
Fund managers
Another corner of the financial services sector that currently has some big dividend yields is fund management.
M&G, for example, yields 8.4% while Jupiter offers 9.6%. Both of these companies are well-known names with sizeable customer bases – so why do they have such high dividend yields?
I think the yields reflect investor concerns about the outlook for these businesses. M&G shares have been marked down 13% over the past year, with Jupiter shares losing 36% of their value. Those share price falls suggest mounting fears about future profits in my opinion. But last year, Jupiter grew both revenues and post-tax profits. M&G, by contrast, saw both slide.
What comes next? One of the reasons for M&G’s profits falling was changing asset prices. With stock markets moving around a lot around the world right now, that could continue to be a risk for both firms. Then again, depending on what happens to asset prices, it could also help them grow profits in coming years. Either way, with strong brands, large customer bases and big dividends, I would consider owning both shares in my portfolio.
Tobacco
Another sector many investors see as a safe haven when it comes to dividends is tobacco, thanks to its highly cash generative nature.
It is not a safe haven in reality – Lambert & Butler maker Imperial Brands slashed its dividend a couple of years ago. Both it and competitor British American Tobacco face an ongoing risk from falling demand for cigarettes.
Despite that, I would consider these two shares for my portfolio. Imperial yields 9% while British American yields 6.1%. Although cigarette sales are falling, they remain substantial. Last year, British American reported over £23bn of revenues from combustible products such as cigarettes. It has also been growing its non-cigarette product lines strongly. Revenue in that division grew by 51% last year, although for now it remains loss-making. Imperial has less focus on such products, but I think that may make sense strategically. Once giants like British American have figured out how to make profits in new product areas, Imperial could ramp up its own activity using a similar model.
Although I see risks from falling cigarette use, these two companies attract me for their dividends. I own both in my portfolio.
Other UK shares to buy for dividends
The last two names on the list of dividend shares I would consider buying for my portfolio come from different areas.
One is comparison website operator Moneysupermarket.com. It currently yields 6.3%. The shares have fallen a third over the past year. Revenues and profits have fallen for two years in a row and last year, earnings per share did not cover the dividend. If that keeps happening, the dividend is at risk. But the company is well-established and has a deep understanding of comparison shopping.
I think that could come in handy. For example, although changes to insurance pricing rules may lead to less comparison shopping, surging energy prices could mean many consumers try to find the best gas supplier for their needs. I would consider buying the shares for my portfolio but would keep a close eye on management efforts to return the business to growth.
My final choice would be the Income and Growth venture capital trust, currently yielding 8.4%. It invests in a variety of early stage companies it thinks can grow.
When they do well and start paying out dividends, that can boost Income and Growth’s own payout potential. But if the investments do poorly, there will be less profit to fund Income and Growth’s own dividend. That helps explain why its dividend has moved around a lot. But I see ongoing potential for substantial payouts and would consider adding these income shares to my portfolio.
