As a veteran investor, my investing strategy is built on three simple principles. First is diversification: spreading my money widely across many markets. Second is capital gains: investing for future share-price growth. And third is high yields: investing in shares paying bumper cash dividends.
I love high yields
Like many older investors, my wife and I use dividend-paying shares to generate income for our family portfolio. Indeed, almost all our passive income comes from share dividends.
But share dividends are not guaranteed — and can be cut or cancelled at any time. During the good years, dividends often go up, but can fall during bad years. For me, dividends are one of the riskiest forms of income — but easily my favourite.
Also, not all UK-listed companies pay out cash dividends to their shareholders. In fact, the vast majority of shares in London don’t. Happily, most companies in the blue-chip FTSE 100 index do pay out dividends, so that’s where I hunt for high yields.
Three FTSE 100 dividend dynamos
For example, here are three Footsie firms whose shares offer some of the highest yields in the London market:
| Company | British American Tobacco | M&G | Vodafone Group |
| Industry | Tobacco | Asset management | Telecoms |
| Share price | 3,157.5p | 200.82p | 99.0p |
| One-year change | -7.8% | -6.6% | -28.7% |
| Market value | £70.6bn | £4.7bn | £26.8bn |
| Price-to-earnings ratio | 10.8 | N/A | 15.4 |
| Earnings yield | 9.3% | N/A | 6.5% |
| Dividend yield | 7.0% | 9.2% | 7.8% |
| Dividend cover | 1.3 | N/A | 0.8 |
For the record, my family portfolio already includes one of these shares, as we bought Vodafone Group stock at a share price of 90.2p in December. Vodafone shares are down nearly 30% over the past 12 months — and this tumble pushed them onto my watchlist of bargain-bin shares.
Vodafone’s share price has risen around 10% since our purchase, giving us a modest capital gain on paper. However, this price rise has also lowered the firm’s bumper dividend yield to 7.8% a year. And though it’s been a tough few years for the group, I expect the next round of consumer price hikes to help support this cash payout.
I’d buy the other high yielders today
As I said earlier, my portfolio strategy relies heavily on dividends for income, either to spend or reinvest into more shares. And that’s why I’d gladly buy the two other high-yielding stocks in the table above, yet I won’t right now.
As one of the world’s leading cigarette manufacturers, British American Tobacco is what some folk call a ‘sin stock’. And ESG (environmental, social, and governance) investors tend to shun such shares.
But as a smoker myself, I see no problem in profiting from my own filthy habit. And I’m keen on BAT’s 7% cash yield, covered 1.3 times by earnings. However, I won’t buy BAT stock, because my wife would very much disapprove. And I strongly subscribe to the saying, “Happy wife, happy life”!
The third and final high-yielder is investment manager M&G, whose shares pay a bumper 9.2% a year in cash. Although its dividend payout is not covered by historic earnings, M&G fully intends to maintain its current dividend strategy. Therefore, I’ve added M&G to my watchlist of potential shares to buy when the new tax year starts on 6 April. Watch this space…
