As a believer in long-term investing, I take a buy-and-hold approach to investing. Two of the FTSE 100 shares I own in my portfolio that I currently plan to hold for years currently have dividend yields well above the index average. They also both increased their most recent annual payouts, although that is not necessarily an indicator they will do so again.
Here is why I hold them – and some things I am watching out for.
M&G
The higher yield of the pair is offered by M&G (LSE: MNG).
At the moment, its dividend yield is a beefy 8.6%. So if I put in money today and the dividend is simply maintained, after 12 years I ought to have earned back my entire stake as dividends – and would still own the shares.
The financial services company has a dividend policy of maintaining or increasing its payout annually. The interim dividend rose 1.6% this year and I expect a roughly similar increase for the full year level when the company announces its final results next week.
Large customer base
I do not see M&G as a very exciting business, but that does not mean it is not an exciting share for me to own given the income prospects.
It operates in a market that I expect will see high long-term demand. The well-established M&G brand can help it attract and retain customers. The business has over 5m retail customers as well as an institutional client base.
I see an advantage in the company operating in almost 30 markets worldwide. That exposes it to risks, but reduces its reliance on the UK market compared to more domestically-focused competitors.
However, the company’s expansion policy of buying financial advisers remains to be proven in my opinion. It could eat into profits.
Last year saw post-tax profits dive. If that continues, the dividend could be at risk. But I think last year’s weak earnings reflected volatile market prices rather than underlying weakness in the business.
British American Tobacco
Another FTSE 100 company I own is British American Tobacco (LSE: BATS).
The firm has a stellar dividend history. It has raised its annual payout every year this century. The latest increase came this month, when the Lucky Strike maker boosted its annual dividend by 6%.
Cigarettes are in long-term decline and it is possible that one day they might disappear altogether. For now the company’s pricing power gives it some protection against falling demand. But hiking prices to mitigate falling volumes has its limits as a strategy.
Meanwhile, though, the cigarettes business remains massive. Even with a 5% decline year on year, British American sold over 600bn cigarettes last year.
On top of that, the company has been aggressively growing its non-cigarette business. I have my doubts about whether that will offer the high profit margins of cigarettes. So far it remains a loss-making business for the firm. But British American has a stable of famous brands and a distribution network that could be long-term competitive advantages in the non-cigarette market.
