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I’d buy these FTSE 100 stocks to get income of 8.6% a year today

Dividend yields are like manna in today’s low interest-rate world and some of the returns you can now get are mind-boggling.

High society

The top 10 yielders on the FTSE 100 offer an average payout of an incredible 8.6% a year, according to research from AJ Bell. This could be the perfect time to take advantage of recent market dips to load up for the long term.

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AJ Bell’s latest Dividend Dashboard report shows that share price falls and growing dividend forecasts have driven up dividend yields at some of the UK’s largest companies. And there’s more to come with payouts forecast to grow 10% across 2018 to hit a record high.

Take cover

You should always check how well dividends are covered by earnings. Ideally, you want them to be covered twice. The lower the number, the more wary you should be, as the payout could prove hard to sustain in future. The 10 highest yielders on the FTSE 100 have average cover of just 1.3 times earnings, so approach with caution, although the good news is that cover is improving, thanks to higher earnings forecasts. 

The two biggest income hitters, house-builder Persimmon and Russian mining giant Evraz, offer double-digit yields of 10.2% and 10%, respectively. Cover is thin at 1.17 times earnings and 1.22, respectively but, as I wrote a couple of days ago, their dividends may still be sustainable.

Construction time again

There are two more house-builders in the top 10 yielders, Taylor Wimpey in third place with a whopping yield of 9.3%, and Barratt Developments in ninth place, yielding 7.8%. This sector has been hit by rising interest rates and the uncertain future of the Government-backed Help to Buy scheme, which underpins buyer demand for new-build properties. 

Share prices have fallen sharply as a result, but so far most dividends have survived. The sector is risky but tempting, given bargain valuations. 

Company

Yield, 2018 E

Earnings cover, 2018 E

Persimmon

10.2%

1.17x

Evraz

10.0%

1.22x

Taylor Wimpey

9.3%

1.37x

SSE

8.8%

0.85x

Direct Line

8.5%

1.08x

Vodafone

8.4%

0.68x

Centrica

7.9%

1.06x

Standard Life Aberdeen

7.9%

0.95x

Barratt Developments

7.8%

1.52x

Imperial Brands

7.2%

1.42x

Average

8.6% 

1.13x

As you can see from the table, dividend cover is particularly thin at energy giant SSE, although its prospects look brighter following a recent positive update. Standard Life Aberdeen also has cover below one, but is firmly in bargain territory after a 30% slide in its share price. Further stock market volatility could bring even bigger discounts. Direct Line Insurance Group also tempts and, although cover is thin, it’s pledged to return most of its profits to shareholders.

Blue-chip income

What impresses me is that these companies are mostly big, solid names with stout dividend histories, particularly Vodafone, Centrica and Imperial Brands. There are plenty more strong income stocks on the FTSE 100, which is now expected to yield 4.3% for 2018, and 4.5% for 2019, helped by forecast 10.6% dividend growth this year, and 5.5% next, AJ Bell says.

The UK’s blue chip index is on course to pay out a record high £89.8bn in 2018. You simply can’t afford to ignore that kind of return, and current volatility offers an exciting opportunity for long-term investors.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Standard Life Aberdeen. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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