Some of the best dividend stocks I own are on the FTSE 100. But that doesn’t mean low-cap cheap shares on the UK market can’t deliver decent income.
In fact, there are some surprisingly high yields on the FTSE All-Share and AIM index. But are they worth the risk? Let’s take a look.
Taylor Wimpey
One of the UK’s largest property developers, Taylor Wimpey (LSE: TW.) has seen its dividend yield climb above 9% this year. That follows a 20% share price decline, bringing the shares down to 99p each.
But with earnings expected to improve, its forward price-to-earnings (P/E) ratio of 12.15 suggests it could now be undervalued.
That makes it a stock worth considering for both income and value investors.
However, a weak UK housing market has seen its earnings decline by 65.8% year on year. With an eye-wateringly high payout ratio and weak cash coverage, a dividend cut is a strong possibility.
If the UK housing market recovers in 2026, it could be a good opportunity at this price. But that’s a big if.
RWS Holdings
RWS Holdings (LSE: RWS) is a translation technology company with a 70p share price and an exceptional dividend yield of 17.5%. That immediately raises serious questions about its sustainability. With a payout ratio of 182%, earnings coverage is weak.
But according to reports, the company has sufficient cash to cover dividend payments by 1.75 times. That’s still slightly below the recommended 2 times, but it’s not bad. Still, if profits don’t improve soon, a dividend cut is certainly on the cards.
It recently refinanced its credit facility and launched a new organisational structure, which is a good start.
But the stock is already down 62% this year, so without strong evidence of a recovery, I’d be wary of investing too much here. Still, for those with a high appetite for risk, it could present an attractive income opportunity worthy of further research.
Impax Asset Management
At 188p per share, Impax Asset Management (LSE: IPX) isn’t the cheapest on the market. But with a forward P/E ratio of 8.17, it’s cheap compared to projected earnings. As the name suggests, the company is an asset management company operating across Europe, America and Australia.
Before 2023, its revenue and earnings were steadily increasing, but lately, they’ve suffered mild losses. Encouragingly, it has an attractive 14.7% yield and relatively decent dividend coverage. Its payout ratio is only just above 100% and cash coverage is 1.2 times. That’s not great, but sufficient to avoid the threat of an immediate cut.
So with a share price that’s down almost 70% in the past five years, what’s the chance of a recovery?
With results coming out next Wednesday (26 November), we’ll get a better idea of how well its turnaround strategy is going. Until then, I’d hold off on making any decisions as an earnings dip could lead to a dividend cut.
Final thoughts
High yields always present an attractive risk vs reward opportunity. But investors shouldn’t be misled by the high potential returns. Rarely do stocks maintain 10%+ yields for long.
A crashing price and a sudden dividend cut could wipe out recent gains. While the above shares may be worth considering for yield hunters, long-term sustainability is the real goal when targeting dividend income.
