Forget bond yields! These 3 LSE dividend stocks now yield more than 8%

Bond yields are rising, but these three dividend stocks all pay more generous income and offer superior capital growth prospects.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young woman holding up three fingers

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I prefer to generate my income from dividend stocks rather than bonds, and the events of last week aren’t going to change that.

Bond yields have soared in recent days as investors reckon that interest rates will now have to stay higher for longer. Ten-year gilts and 10-year US Treasuries now both yield almost 4.8%, the highest since 2007.

Investors are asking why take the added risk of investing in equities, when they can finally get a decent return from bonds.

I’d choose shares over bonds

I can name three reasons, namely wealth manager M&G (LSE: MNG), housebuilder Taylor Wimpey (LSE: TW) and commodity giant Rio Tinto (LSE: RIO).

All three FTSE 100 stocks are paying me income of more than 8% a year. That’s far more than any government bond I’d consider buying, and they offer superior capital growth prospects too.

M&G actually yields 10.06%. While double-digit yields can be precarious, I think there’s a fair chance this one is sustainable. Last month, it posted first-half adjusted operating profits of £390m, up 31% in a year. Consensus only expected £284m.

The board said it’s on track to meet its operating capital generation target of £2.5bn for 2024, and 2025 looks promising too. M&G has also generated steady share price growth over the last 12 months, rising 15.62% despite recent stock market volatility.

The Taylor Wimpey share price is at the mercy of interest rate expectations. When the Bank of England suggested UK rates had peaked, it soared. When markets started fretting about US Federal Reserve hawkishness, it fell.

Rates rise, this stock falls

Higher interest rates and falling house prices are bad news for Taylor Wimpey. It would hit orders and sale prices, at a time when build costs are still high. Yet the risk seems priced into its valuation of just 6.02 times earnings. Perhaps, surprisingly, its share price is up 23.09% over the last year. It was really oversold before.

The housing market will get worse before it gets better. The same could be said for Taylor Wimpey’s financial performance, with first-half profit before tax falling 29% to £237.7m. However, it has a net cash position of £654.9m. The dividend looks secure although, as ever, there are no guarantees.

Like all FTSE 100 commodity stocks, Rio Tinto has been hit by trouble in China, the world’s biggest consumer of metals and minerals. Its share price is down 1% in the last year. But investors can console themselves with a yield of 8.13%.

Rio’s shares are also really cheap, trading at 7.37 times earnings. The risk is that China’s problems get worse rather than better. Another danger is that the US slips into recession, further squeezing demand.

The board halved its dividend earlier this year, so it cannot be relied upon. Nevertheless, I would still bank on it to deliver superior total return from income and growth than government bonds over the longer run.

At some point markets will kick on, and these three shares will feel the benefit. If the shares fall in the interim, I’ll buy more of them at the lower price.

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.

Harvey Jones has positions in M&G Plc, Rio Tinto Group, and Taylor Wimpey Plc. The Motley Fool UK has recommended M&G 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.

More on Investing Articles

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Would a stock market crash matter?

Christopher Ruane explains why a stock market crash could turn out to be positive, not negative, for a private investor…

Read more »

Investing Articles

Has the Rolls-Royce share price peaked?

After a strong 2023 performance and (so far) in 2024, the Rolls-Royce share price has stuttered in recent days. Christopher…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Turning a £20k ISA into a £13,900 yearly second income? It’s possible!

By investing a £20k ISA now using certain basic principles, our writer thinks he could set up a second income…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With no savings, I’d follow Warren Buffett’s number one rule to build wealth

Can this one piece of Warren Buffett wisdom really help our writer as he aims to build wealth in the…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

A second income of £1k a month from just £10 a day! How would I do that?

Mark David Hartley considers how to build a second income stream starting from just £10 a day. Is £1,000 a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Turn £8,900 into a £24k annual passive income? Here’s how!

Christopher Ruane applies some investing lessons from billionaire Warren Buffett when explaining how he'd aim to earn sizeable passive income…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »