I’m on the hunt for high-yielding UK income shares listed on the FTSE 100 and I feel a little bit spoiled for choice.
Some of the most exciting opportunities come in the housebuilding sector, where Barratt Developments currently yields 7.38% and Taylor Wimpey yields 7.33%. Both look good value too, trading at 6.1 and 6.8 times earnings respectively.
However, I already own shares in peer Persimmon, and would like to diversify into another sector.
I’m hunting for dividends
Tobacco stocks are a reliable source of dividend income. British American Tobacco yields 7.44% today, while Imperial Brands yields 7.18%. Again, Both look cheap at 7.8 and 7.4 times earnings respectively.
I don’t buy tobacco stocks, which is a shame as they’re terrific investments, but luckily there are plenty of top income shares in other FTSE 100 sectors and here are two of my favourites.
The first is fund manager M&G (LSE:MNG), which currently yields 9.7% a year. I was so dazzled by that dividend, that I bought the stock in March. Its share price is up 15.37% since then, and I’ve got those dividends to look forward to.
Yet M&G was a risky buy. High yields can be a sign of a company in trouble, whose share price has either crashed or gone nowhere for years.
They also require plentiful cash flows, yet last year capital generation at M&G tumbled from £1.87bn to a negative £397m. Despite that, management still hiked the dividend by 7.1% to 19.6p per share, and pushed through a £503m share buyback on top.
Cash doesn’t seem to be a big problem there, and the board expects to generate £2.5bn of capital this year.
There are other risks. Any stock market volatility will hit M&G particularly hard, as inflows and percentage-based fund management fees will plunge. Its share price hasn’t exactly set the world on fire since it peeled off from Prudential in June 2019.
Yet as I plan to hold it for a minimum 10 years, and ideally for life, I have time to recover from short-term setbacks and I’m pleased to hold M&G. The same applies to Rio Tinto (LSE: RIO), which I bought in November.
I buy for the long term
After starting well, the Rio share price has suffered a string of setbacks. In February, the company halved its dividend as profits slumped, due to slowing Chinese demand for its main product, iron ore. Higher costs didn’t help either.
In March, Rio Tinto settled a $15m Guinea bribery case with US regulators then, last month, it was forced to cut copper output guidance, due to weather and technical issues at two plants. If the world tips into recession this year, as many expect, that could prove a further blow to demand.
I like to buy good companies like Rio Tinto when they’re cheap, and that’s certainly the case here. It currently trades at just 7.7 times earnings, which looks like a buying opportunity to me.
Despite that dividend cut, it still yields 8.01%, covered 1.7 times by earnings. The forecast yield is 11.9%, but we’ll see about that.
I’d happily top up my holdings of both M&G and Rio Tinto if I had the cash today. Rio in particular looks even better value than before.
