Overall, FTSE 100 stocks have proven remarkably resilient in the ongoing economic instability. The index is actually up slightly over the last 12 months, and that doesn’t include any gains achieved through dividends. However, this performance is somewhat misleading due to the way the index is weighted.
The largest businesses have the biggest influence over the FTSE 100’s price point. And a closer inspection reveals that not all constituents have fared well. However, this means a potentially lucrative opportunity when it comes to dividends.
The yield of an investment is inversely correlated with price. In other words, when a stock price drops, the yield goes up. And with plenty of FTSE 100 companies being caught in the crossfire of panicking investors, there are now some chunky payouts being offered.
The highest-yielding shares
As of this week, there are 33 FTSE 100 stocks with a dividend yield higher than the index’s 4% historical average. However, just looking at the top 10, investors could potentially lock in a whopping 8.9% yield today!
| Company | Sector | Dividend Yield |
|---|---|---|
| Phoenix Group Holdings | Life Insurance | 11.06% |
| Vodafone | Telecommunications | 9.89% |
| M&G | Investment Banking Services | 9.73% |
| British American Tobacco | Tobacco | 9.19% |
| Legal & General | Life Insurance | 8.84% |
| Taylor Wimpey | Homebuilding | 8.46% |
| Natwest Group | Banking | 8.17% |
| St James’s Place | Life Insurance | 8.06% |
| Imperial Brands | Tobacco | 7.90% |
| Aviva | Life Insurance | 7.82% |
Looking at the list, investors have a broad range of companies to pick from, covering various industries such as financials, consumer stables, real estate, and telecommunications. And being well-diversified during volatile market conditions can work wonders in keeping risk in check.
If I were to invest £1,000 in each one of these companies (that is, £10k in total), at an 8.9% overall yield, my portfolio would be generating £890 in passive income within the first year. Left to compound over a decade, this passive income would more than double to £2,160.
As exciting as this wealth-building prospect sounds, sadly, investing isn’t that simple. And building a portfolio out of these companies could easily end up destroying wealth rather than creating it.
High yields are rarely sustainable
There are always exceptions. But in most cases, a firm offering a near-double-digit payout isn’t likely to continue doing so in the future. Don’t forget high yields are most commonly caused by falling stock prices. And while the current environment is filled with panicky investors, sometimes a rapid decline in share price is warranted.
For example, take a look at the two tobacco stocks in the list. Both British America Tobacco and Imperial Brands have provided high yields for years. But their market capitalisations have been slowly shrinking along the way.
The regulatory environment surrounding tobacco products is becoming increasingly strict, with the UK government recently proposing a new ban on cigarettes. These firms have been diversifying into healthier alternatives. But even these new products are starting to catch the gaze of regulators, placing a giant question mark over the longevity of these enterprises.
Therefore, investors can’t skip their due diligence. Every investment, growth or income needs to be carefully scrutinised to understand the risks and threats that might invalidate an investment thesis. That way, an informed decision can be made, increasing the probability of building a winning portfolio.
