I have been looking at adding some more FTSE 100 shares to my portfolio.
A couple that have yields above 8% are on my radar. If I had spare cash this month, I would buy one but not the other. I will explain why.
Imperial Brands
First up is one of the two tobacco companies in the FTSE 100: Imperial Brands (LSE: IMB).
I own its rival British American Tobacco and indeed used to have a stake in Imperial at one point.
Like British American, a key risk is the long-term decline of smoking in many markets around the world. That could lead to lower revenues.
With its brand portfolio and the addictive nature of tobacco, Imperial has some leeway to try and offset falling revenues by raising prices. But that approach has its limits.
Imperial has been trying to make the most of its existing cigarette business by trying to build market share in five key sales territories. So far, that seems to be working. Last year saw sales revenues fall slightly but earnings per share were up over 50% year-on-year.
An ongoing share buyback should reduce the number of outstanding shares. That could enable Imperial to raise its dividend per share (up 4% last year) without spending more money overall.
I like the yield of 8.6%. Imperial slashed its dividend in 2020. One medium-term concern I have about the dividend’s sustainability is Imperial’s weaker push into non-cigarette products than rivals like British American.
Legal & General
Financial services giant Legal & General (LSE: LGEN) is also a member of the FTSE 100. Its dividend yield is slightly lower than Imperial’s, at 8.3%, but still over double the average FTSE 100 yield.
With a strong brand, large customer base and focus on a market likely to see strong ongoing demand, I think Legal & General could continue to do well in future. This month it announced a 5% increase in its annual dividend per share.
I think there could be more scope for dividend raises too. But that may depend on how market conditions affect investor sentiment. If rocky markets lead to falling asset values and some investors withdrawing funds, the dividend may be cut, as it was in the 2008 financial crisis.
As a long-term investor though, while Imperial is fighting falling demand for its core products, I think Legal & General could benefit from growth. Last year it recorded record volumes in its insurance businesses. I think its proven model could continue to do well.
I’d buy one
I reckon both shares have some things going for them. That is why I have owned both before now.
Tobacco faces declining demand in the cigarette segment. But that has already been true for decades in some markets, yet dividends in the sector remain juicy.
I like British American’s track record of annual dividend increases dating back to the last century more than Imperial’s record though.
Looking forward, I also prefer British American’s strategy of quickly growing its non-cigarette sales compared to Imperial’s more cigarette-focused approach.
So if I had spare cash to invest today, Imperial would not be on my FTSE 100 shopping list – but Legal & General would.
