3 income shares I’d buy for extra dividends

While searching for the best income shares, I found these three FTSE 100 stocks that offer dividend yields of 9% to 12% a year. I’d buy all three today!

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As global stock markets slumped in recent months, I’ve spotted three key trends. First, that large-cap shares are dropping less steeply than small-cap stocks (big is beautiful). Second, that value shares seem to be outperforming growth stocks (value beating growth). Third, that high-yielding shares seem to be doing better than no- or low-dividend stocks (cash yields rule). And this is why I have been intensifying my search for large-cap income shares that pay generous dividends to shareholders.

Over £81bn from FTSE 100 income shares

By one estimate, total dividends paid by FTSE 100 companies will reach £81.2bn for 2022. Added to an estimated £32.7bn in share buybacks, this would make this year the second-best ever for cash returns. Nice.

Of course, if I buy the entire FTSE 100, then I get the average dividend return of that index. Right now, the index’s cash yield is hovering around 4% a year. However, up to 97 of FTSE 100 members are forecast to pay dividends in 2022, so there’s plenty of Footsie dividend payers for me to choose from.

Three high-yielding FTSE 100 stocks

My latest quick search of the FTSE 100 found no fewer than 13 shares offering dividend yields above 6% a year. But in several cases, these high cash yields were not covered by latest annual earnings. After further filtering, I found these three income shares I don’t own that offer market-thrashing cash payments (sorted by dividend yield):

CompanyIndustryShare price52-week low12-month changeMarket valuePER*Earnings yieldDiv. yieldDiv. cover
PersimmonHousebuilder1,949p1,929.5p-36.9%£6.2bn7.912.6%12.1%1.0
Rio TintoMiner5,197p4,354p-11.7%£85.4bn5.020.2%11.1%1.8
AbrdnAsset manager164.3p159.85p-41.8%£3.6bn3.628.0%8.9%3.2
*PER is price-to-earnings ratio, one measure of how highly a company’s earnings are valued by the market.

As you can see, all three shares have lost value over the past 12 months, with declines ranging from almost 12% at mega-miner Rio Tinto to nearly 42% at asset manager Abrdn. Also, a mini-portfolio consisting of only these three stocks would have lost over 30% of its value in the past year. Ouch.

One thing that draws me to these cheap shares is their earnings yields. At present, the FTSE 100 has an earnings yield of around 7.1%, while the highest among these three is a whopping 28%. Such high earnings yields also translate into market-beating dividend yields. The above dividend yields range from nearly 9% a year to above 12%, versus around 4% for the FTSE 100. So all three are dividend dynamos to me — and the average cash yield across the three comes to 10.7% a year.

Why buy now?

But why should I be brave and buy shares now, when the future looks so uncertain? After all, there’s war between Russia and Ukraine, rapidly rising inflation, rising interest rates, slowing economic growth, and lockdowns in China for me to worry about, right?

On the other hand, I see these shares as so cheap that much of my current concerns appear to be already baked into these three stock prices. Indeed, Persimmon and Abrdn are hovering just above their 52-week lows right now. And that’s why I’d bite the bullet by buying these three income shares today!

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.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has 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.

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