FTSE 100 stalwarts Lloyds and Glencore get a lot of attention from dividend share investors. But for investors searching for high dividend yields, I think there are plenty of other interesting choices.
The two companies I’m going to look at today offer yields of up to 8%. I think they could both perform well over the next few years.
#1. Buy when it’s cheap
Many businesses operate through cycles that see profits rise and fall depending on external market conditions. Mining and oil are the obvious examples, but the packaging industry is another.
The first company I want to look is FTSE 100 packaging producer DS Smith (LSE: SMDS). This business only sells fibre-based products — cardboard and paper — and recently hit its target of producing 100% recyclable or reused packaging.
DS Smith aims to go further over the next few years, producing new products to “take 1 billion pieces of problem plastics off supermarket shelves”.
Shares in this business have been in a bit of a slump in recent years. But this hasn’t been reflected by falling profits. Operating profit last year was 40% higher than in 2018.
While profits did fall during the pandemic, they bounced back in 2022. What really seems to have happened is that DS Smith shares have de-rated to a lower valuation.
Back in 2018, the shares traded on about 15 times earnings. Today, they’re trading on a price-to-earnings ratio of less than 10.
I think the market is worried that demand for packaging could slump in a recession. That’s definitely a risk, in my view, but the numbers suggest to me that DS Smith is already priced quite cautiously.
The company recently confirmed that its 2022/23 results should be in line with forecasts. That leaves the shares trading on seven times forecast earnings, with a 6% dividend yield.
Although this year is expected to be tough, DS Smith looks in good shape to me, with improving profitability and reduced debt. I see the shares as a good buy at current levels.
#2. An 8% yield!
Insurance and retirement group Aviva (LSE: AV) currently offers a forecast dividend yield of 8%. Should investors be worried at such a high yield — or should they back up the truck?
I would never go all-in on Aviva, or any other stock. Large, complex financial businesses like this one always carry some risk. This can be difficult for outside investors to spot until it’s too late.
Even so, I do believe Aviva shares offer good value and a fairly safe outlook at the moment.
Last year’s results showed that the company’s Solvency II own funds generation — surplus cash available for dividends — rose by 37% to £1.6bn.
Perhaps more importantly, Aviva’s performance was in line with its previous guidance and targets. This suggests to me that management are in control, and have a clear understanding of the likely performance of the business.
The latest management guidance is for a £915m dividend this year. That’s equivalent to a dividend of 32.8p per share, giving an 8% yield at current levels. That looks very attractive to me.