Why I’m convinced this dividend stock is the best 5%-yielder on the FTSE 100

With an above-average yield of 5.6% and monopoly status in its primary markets, what’s not to like about this Footsie dividend stock?

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There are presently nine dividend stocks in the FTSE 100 that are yielding 5%-6%.

I’m going to choose the best one based on how sustainable I think the current level of dividend is. This is influenced by many factors, the most important of which is earnings potential.

StockCurrent yield (%)
SSE5.9
Kingfisher5.7
Lloyds Bank5.6
National Grid5.5
HSBC5.5
WPP5.4
Schroders5.3
Hargreaves Lansdown5.1
Barclays5.0
Source: Dividend Data

Woe

Immediately, I’m discounting WPP and Kingfisher as both have recently reported disappointing results.

On 7 August 2023, WPP issued a profits warning. Although its interim dividend remained unchanged, it reported a 51% fall in earnings for the first six months of 2023, compared to the same period in 2022. Its generous yield is due more to a falling share price than exceptional shareholder returns.

On 19 September 2023, Kingfisher’s stock fell 11% when it announced a 31% drop in operating profit for the half-year ended 31 July 2023. The owner of B&Q also downgraded its forecasts but maintained its interim payout.

I think an uncertain outlook for these two companies means their dividends could be cut soon.

Financial giants

The three banks on the list – Lloyds, HSBC, and Barclays – are benefitting from the higher interest rate environment that we are currently experiencing.

But I’m nervous about the potential for bad debts to wipe out any increase in interest income. All three have increased their provisions against their loan books over the past year.

Up and down

I prefer stocks that pay consistent dividends.

Hargreaves Lansdown‘s has been highly erratic in recent years. I know some of this volatility can be attributed to the pandemic, but the 2023 dividend is still 24% lower than it was in 2020.

Financial year (30 June)Dividend per share (pence)
201942.0
202054.9
202150.5
202239.7
202341.5
Source: company annual reports

Schroders paid 114p a share in 2018-2020 before increasing it by 8p in 2021. However, in 2022 it was slashed to 52p, and is likely to fall again in 2023.

High energy

This leaves the two utilities on the list — SSE and National Grid. This is not surprising given that stocks in the sector have a reputation for offering steady and reliable returns.

I think SSE is a solid company. It’s investing heavily in renewables and reported an 89% increase in profit before tax for the year ended 31 March 2023, compared to 2022.

But wholesale energy prices are falling and the domestic market is starting to see increased competition once more.

My choice

In contrast, National Grid enjoys a monopoly position in its key electricity and gas markets.

The price it has to pay for this privileged position is regulation. But it has guaranteed revenues and is incentivised to achieve operational efficiencies. It has forecast earnings per share to increase annually by 6%-8% through until 2026.

The company has a long history of increasing its dividend payments year on year — in 2023 it went up by 8.8%. Encouragingly, it’s been 12 years since it last cut its payout.

But there’s not much headroom when it comes to returning cash to shareholders. For its 2023 financial year, its dividend was covered 1.3 times by earnings. Analysts generally look for a ratio of at least two.

And it has large debts.

I know there are other stocks presently offering higher yields. But National Grid’s my favourite of those in the 5%-6% range.

In fact, I’m so convinced that the stock will make a good long-term investment, I’ve recently bought some.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Beard has positions in HSBC Holdings, Lloyds Banking Group Plc, and National Grid Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Hargreaves Lansdown Plc, Lloyds Banking Group Plc, and Schroders Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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