The FTSE 100 is one of the best stock markets in the world for dividend income shares, and I’m buying all I can afford right now.
Lately, I’ve been snapping up the big, obvious high-yielders like Legal & General Group, which yields 7.59%, and wealth manager M&G, which pays a blockbuster income of 8.68%. They’re among the highest yields on the entire index.
Yet I don’t buy every cheap FTSE 100 high-yielder I see. I’m fighting shy of BT Group (LSE: BT.A), which faces a sea of troubles, including hefty net debt, an oversized pension scheme, high capital demands, and declining profits.
I’m really into dividends
It’s a shame as there may be a real opportunity here. The shares trade at just 5.9 times earnings while the forecast yield is 6.5%, covered 2.5 times by earnings. Management has embarked on a massive cost saving operation, which could ultimately reduce BT’s headcount by 55,000 by 2030, bringing huge savings.
CEO Philip Jansen reckons he’s building a “leaner business with a brighter future”, and he’ll do it by continuing to “connect like fury, digitise the way we work and simplify our structure”. It sounds promising, but there’s a long way to go. With the stock down 10.65% over one year and 51.23% over five years, it’s a risky choice. I’m leaving that one for a while.
There is also great value slightly down the yield scale. Utility National Grid offers one of the most secure dividends on the FTSE 100, due to its role as a regulated monopoly. The yield is a smashing 5.4% a year, and forecast to hit 5.7% next year.
That’s the beauty of dividend-paying shares. The income isn’t fixed as in a savings-rate bond. It should rise over time, as companies increase their profits and share their good fortune with investors. There are no guarantees, though. If profits fall, dividends can be cut. That’s the risk investors take to generate the potentially higher long-term rewards from equities.
Rewards outstrip risks for me
It’s worth pointing out that as well as dividend income, stocks offer the potential for capital growth, too. Again, there are no guarantees. BT investors have suffered a massive loss of capital, National Grid investors have done better, with the stock up 28.83% over five years (although it’s fallen 1.01% over 12 months).
Sometimes companies with relatively low yields are the most proactive in increasing their dividends. The yields may look disappointing but that’s only because the stock has been bombing along and yields are calculated by dividing a company’s dividend per share by its share price.
Take retailer Next. It hiked its dividend per share by 62% from 127p in 2022 to 206p in 2023. That’s a huge increase but with the share price up 31.28% after one year and 77.81% after five years, the yield remains modest at 2.4%. Few investors are complaining, though. Next shares aren’t dirt-cheap but they aren’t exactly expensive at 14.81 times earnings.
Mostly, I’m buying high-yield shares, but I’m also looking for shares that will grow their dividends tomorrow. I’d consider buying all the ones listed here, but not BT, not yet.
