Often, blue-chip FTSE 100 shares have fairly low yields compared to more speculative businesses without long track records. Right now though, a lot of shares in the leading index have juicy dividend yields. I think now could be the moment for me to construct a high-yield portfolio of FTSE 100 shares.
I reckon I could achieve a dividend yield of 9% doing that and if I had spare cash to invest, would do so. In fact, I would do it immediately, as nobody knows how long such high yields from blue-chip shares might last.
Why yields are high
To start, a quick recap on yields might be useful. At the moment, interest rates are higher than they have been for many years. As investors pull funds from the stock market, some share prices have suffered and yields have risen.
Right now, I can look across the FTSE 100 and find household names offering yields of 5%, 7%, 9%, or even 10%.
Will that last forever? I doubt it.
I expect that once interest rates move downwards again, money will pile back into the stock market. That could push up share prices, leading to yields falling.
But imagine I invest in a 9%-yielding share today and the dividend is maintained (which is never guaranteed). My high-yield portfolio will keep earning 9% of my investment cost in future, even if the share price rises and new buyers earn a lower percentage.
The possible catch
However, could my view be an over-simplification?
After all, other investors also know that interest rates will not stay high for ever. But they are still pricing FTSE 100 shares at levels that throw up unusually rich dividends like the 9.1% offered by British American Tobacco, M&G’s 10.1% and Vodafone’s 10.8%.
Might that be because of risks perceived that could lead to lower dividends in future?
After all, Vodafone has previously cut its dividend and its debt load could lead it to do the same again. British American Tobacco has a large debt load too — and its core market of cigarettes is facing structurally declining demand. M&G could suffer from volatile markets leading to investors withdrawing funds.
Quality over yield
I do recognise such risks. I would diversify my high-yield portfolio across a range of companies to reduce the risk of any one share dragging down my yield too much in the event of a dividend cut.
But, before considering yield, I would focus on finding quality companies. Vodafone and British American Tobacco may have a lot of debt, but they also have proven business models and large customer bases. So does M&G.
Other FTSE 100 companies with yields around 9% also have strengths as well as weaknesses. Phoenix and Legal & General are examples. They face risks similar to M&G – but they did not get into the index of 100 leading listed companies by having weak business models.
On balance, I think current valuations offer an outstanding opportunity to build a high-yield portfolio even when sticking just to FTSE 100 firms.
If I had spare cash to invest, I would target a 9% yield by scooping up blue-chip bargains in the current market.
