As an old-school value investor, I like to buy cheap shares and then hold them for years and sometimes decades. And as I get older (I’m 55 this week), I tend to buy more and more income stocks.
What are income stocks?
Income stocks are shares that I buy for their ongoing ability to churn out cash dividends to investors. After all, long experience has taught me that these dividends account for a sizeable slice of my long-term returns.
However, most London-listed shares don’t pay dividends to their shareholders. In many cases, these companies are loss-making, or reinvest their earnings to boost future growth.
Therefore, my happy hunting ground for income-generating shares is the blue-chip FTSE 100 index, where all but a handful of stocks pay regular dividends. Here are five Footsie shares that all offer marketing-beating cash yields to patient investors like me, though I’m always mindful that future dividends are not guaranteed, so they can be cut or cancelled without notice.
Five FTSE 100 dividend shares
Right now, the FTSE 100 offers a dividend yield of around 4% a year. But these five stocks offer dividend yields well above that of the wider index. I’ll start with their share prices, then move on to the stocks’ fundamentals.
| Company | Share price | One-year change | Five-year change | Market value |
| Aviva | 427.5p | -22.3% | -37.1% | £12.0bn |
| Legal & General | 241.6p | -8.8% | -6.4% | £14.5bn |
| M&G | 207.2p | -8.8% | -7.2% | £4.9bn |
| Rio Tinto | 5,559p | +4.9% | +50.3% | £92.5bn |
| Vodafone | 96.25p | -21.0% | -52.3% | £25.8bn |
The only one of these five income stocks to gain in value over the past year is mega-miner Rio Tinto, whose shares are up almost 5%. The remaining four shares have all dropped over the past 12 months, with telecoms giant Vodafone Group and insurer Aviva worst hit.
Of course, falling share prices translate into higher dividend yields (all else being equal, that is). Here’s how these five firms’ cash yields stack up:
| Company | P/E ratio | Earnings yield | Dividend yield | Dividend cover |
| Aviva* | – | – | 7.3% | – |
| Legal & General | 6.6 | 15.1% | 8.0% | 1.9 |
| M&G* | – | – | 9.5% | – |
| Rio Tinto | 8.8 | 11.4% | 7.3% | 1.6 |
| Vodafone | 14.9 | 6.7% | 8.1% | 0.8 |
Note that insurers/asset managers Aviva and M&G‘s trailing earnings are negative. Thus, they don’t currently have valid price-to-earnings ratios, earnings yields and dividend cover. But these figures should be restored this year, as both groups return to profit in 2023.
Shares with both high earnings yields and market-beating dividend yields really appeal to me, especially if their corresponding dividend cover is high. For example, thanks to its impressive 15.1% earnings yield, L&G stock offers a whopping dividend yield of 8% a year, covered 1.9 times by earnings.
Similarly, Rio Tinto shares offer a dividend yield of over 7% a year, covered 1.6 times by earnings. Then again, with the global economy expected to weaken in 2023, earnings at many of these companies will likely take a knock this year. But as a long-term investor, I can ride out this market volatility.
Would I buy all four of these income stocks today? My answer is no, but solely because I already own four of these dividend shares. The only one I don’t already own is M&G, which is already on my buy list for when the next tax year starts on 6 April!
