It’s time to scan the ranks of the FTSE 100 and FTSE 250 to find the highest yielding shares in the UK stock market. Instead of choosing any and every dividend stock, I have a few criteria that I use to filter these companies.
Firstly, I am avoiding firms that seem to have very high incomes, but are on cyclical downturns. That includes principally commodity companies – oil, gas and mining businesses. Because these are likely to see their earnings, and thus their dividends, tumbling.
I am also steering clear of shares that lack consistency in their profitability, because then the income could be cut at any time. Instead we want companies that are likely to increase the amount of money they make and the amount they return to shareholders.
So here are my current 3 high yield picks.
Insurance company Aviva (LSE: AV) was in the wars during the Credit Crunch and the Eurozone crisis, but it has emerged stronger, and highly profitable. It is a global insurer, with businesses in the UK, Europe, Canada and Asia. And it is set to grow earnings steadily over the next few years.
The 2016 P/E ratio is just 9.73, while the dividend yield is a stonking 5.31%, which is well covered by Aviva’s earnings. Eps is set to progress from 21.80p in 2013 to 53.78p in 2017. That is an impressive rate of growth, and the low rating for this firm means this is the ideal time to buy in.
Direct Line Insurance Group (LSE: DLG) is another insurance company, and its Direct Line brand is still one of the most famous in the UK. It was spun out of Royal Bank of Scotland in 2012, and the stock price has been trending upwards since then.
This is a premium insurer, and instead of leaking sales to low cost insurers, it has actually been garnering more business year-on-year. Eps is tracking upwards from 22.58p in 2013 to 29.48p in 2017. The growth has been steady, and it’s been consistent.
What’s more, this is a share that is still reasonably priced, with a 2016 P/E ratio of 13.19 and a 6.86% dividend yield. With so much cash being generated and returned to shareholders, this looks to be a no-brainer investment.
The thing about many stock market bargains is that they often appear unannounced and without fanfare. You need to do your own research to unearth these companies.
Interserve (LSE: IRV) is one of those firms. You may never have heard of it (I certainly hadn’t), yet it has impressive investment credentials. It is a support services and construction company valued at nearly half a billion pounds.
The share price has been sliding, yet this is a company that is still hugely profitable. Seeing this immediately flagged up to me that this was a buy.
The eps was 38.20p in 2013, and is expected to increase to 75.78p in 2017. And the fundamentals are cheap, with a 2016 P/E ratio of just 7.25, with a dividend yield of 7.65%.
The important thing to note is that the income seems to be well covered by profits. That’s why this unknown firm is one of the buys of the moment.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.