The current average FTSE 100 dividend yield is 3.57%. If I’m picking an individual stock with a yield below this, I may as well buy an index tracker that accumulates the income of 3.57% instead. It’s more diversified and lower risk. However, I can target high-yield stocks with dividend potential well in excess of the average. This is riskier, but can provide me with a good return.
A contrarian view on property
My first two picks might surprise some people. They’re Taylor Wimpey (8.40%) and Barratt Developments (8.73%). The current yield is in brackets. Both homebuilders have fallen in value over the past year. This has been driven by the property market falling, as well as a gloomy outlook for this year.
With higher interest rates, it’s more expensive for people to afford a mortgage, or even get one in the first place to buy a property from either homebuilder.
Even though this risk might translate to a lower dividend per share this year, I’m not too concerned. I’m going to have to take some contrarian steps in order to outperform the broader market. To lock in the dividend yield, buying when the share price is low makes sense. Even if the dividend gets cut this year, I still feel the yield will exceed the FTSE 100 average.
And from 2024 onwards, I think the recovery in the economy will see not only a property market bounce, but company profits rising. In turn, the dividend should increase. Yet because I bought the stock when it was low, I should benefit from the share price appreciation and the higher income stream.
High-yield stocks from finance
The other sector with good options is financial services. abrdn (7.36%) and Legal & General (7.42%) are two on my watchlist.
In a similar way to the property stocks, both companies have experienced a share price fall over the past year. This has helped to increase the dividend yield to levels well above the index average.
The main reason for the fall has been due to high volatility and falling financial markets over the past year. Legal & General investors were panicked back in October when the bond market experienced unprecedented moves. abrdn had billions in net outflows of funds it said in the half-year report.
Looking forward, I think the worst is behind us. When it comes to investors wanting to get back into stocks and bonds, I expect 2023 to be a very strong year for investment and fund managers. I also feel we’ll have a smoother political landscape, something that should aid foreign direct investment and less volatile domestic markets.
As a result, I think it’s smart for me to look to lock in the good yields on offer, before the share price starts to creep higher this year. All four stocks are on my watchlist for January, with the aim to purchase when I have some free cash.
