High dividend yields are what many income investors are constantly searching for. After all, the more a company pays out to shareholders, the greater the passive income earned from a portfolio. And luckily for British investors, the UK’s flagship index is home to a wide range of these enterprises.
Even after enjoying a double-digit rally this year, the FTSE 100 still has plenty of constituents offering chunky yields. So let’s take a closer look at some of the biggest on offer right now.
Biggest dividend yields
| Company | Industry | Dividend Yield |
| Phoenix Group | Life Insurance | 10.2% |
| M&G | Investment Banking & Brokerage Services | 9.6% |
| British American Tobacco | Tobacco | 9.4% |
| Legal & General | Life Insurance | 8.9% |
| Imperial Brands | Tobacco | 7.3% |
| HSBC Holdings | Banking | 7.0% |
| Aviva | Life Insurance | 7.0% |
| Taylor Wimpey | House Construction | 6.7% |
| Rio Tinto (LSE:RIO) | Metals & Mining | 6.5% |
| Land Securities Group | Real Estate | 6.5% |
Combined, this collection of dividend shares payout an average of 7.9% in terms of yield. That’s more than double the 3.6% currently offered by the FTSE 100 as a whole. And in terms of money, £10,000 equally invested across all stocks translates into a passive income of £790 versus £360 a year.
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Of course, this income could be boosted by concentrating capital into the higher-yielding enterprises. If all this money were allocated solely to Phoenix Group, then investors would earn £1,020 instead. Pairing that with a bit of capital gains leads to some chunky overall returns in the long run.
Unfortunately, like most things in life, investing isn’t that straightforward.
Yields don’t always go up
Companies are often keen to maintain shareholder payouts wherever possible. Expanding shareholder rewards is a powerful signalling tool that helps improve investor sentiment, which is critical when looking to raise capital. However, these payments are also completely optional. That’s why when business turns sour, like in 2020, dividends often get put on the chopping block.
In these scenarios, a once chunky yield can be massively slashed. And that’s precisely what’s recently happened with Rio Tinto. Despite still being in the top 10, the mining giant’s yield used to be twice as large around six months ago.
Inflation paired with global supply chain disruptions saw prices of iron, aluminium, and copper skyrocket in 2021 and 2022. And the group’s bottom line unsurprisingly followed suit generating record profits, a large chunk of which was returned to shareholders through dividends.
But since then, commodity prices have cooled. Iron ore prices, in particular, have suffered this year, tumbling from around £114 per tonne to £84 – a 26% drop. And since iron’s one of Rio’s primary products, the group’s earnings have crashed back down to Earth resulting in a massive dividend cut for shareholders.
The bottom line
Rio Tinto’s long-term outlook is far from compromised. Management has been steadily diversifying the group’s product portfolio, and its progress into decarbonising the steel industry could yield solid advantages over the next decade. However, market cycles can take years to turn around. And investors may be waiting a while before the yield returns to double-digit territory.
All of this is to say when exploring high-yield investment opportunities, investors must carefully consider the sustainability of the underlying earnings that ultimately fund them.
