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All I want for Xmas is some FTSE 100 high-dividend shares

Image source: Getty Images.

I reckon buying shares in FTSE 100 blue-chip companies and holding them for decades, topping up a bit whenever you have spare cash, is a brilliant approach.

I frequently think about a simple beginners’ no-brainer strategy, which starts by listing the FTSE 100 in order of forecast dividend yield. Pick from the top down, skipping any duplicate sectors, and keep going until you have however many you want.

Top dividends

It depends on which forecasts you use, but this is the top 10 I get:

Company Sector* Dividend P/E
Taylor Wimpey Home construction 11.4% 6.3
BHP Billiton Mining 9.7% 10.4
Centrica Utilities 8.6% 10.8
Imperial Brands Tobacco 8.5% 8.5
Standard Life Aberdeen Asset management 8.4% 10.7
Vodafone Telecommunications 7.9% 19.8
Royal Mail Group Delivery 7.7% 11.8
Aviva Insurance 7.5% 7.0
Royal Dutch Shell Oil & Gas 6.0% 11.7
HSBC Holdings Banking 6.0% 11.8
Average   8.2% 10.9

(*Not strict FTSE-named sectors as there are some distinctions that I don’t think make sense for us)

My first thought is that I don’t like Vodafone shares on such a strange valuation, especially as the forecast dividends are nowhere near covered by earnings — but this is just a simple start. You might also think there’s a bit of risk there with the housing sector under investor pressure, and we have a cyclical mining stock included too.

The list also skips some reliable dividend stocks that you might prefer. For example, I might go for SSE over Centrica. And you might not want Aviva and Standard Life Aberdeen together as their businesses are close.

Market cap

Another favourite simple approach is to just list the FTSE 100 in order of market capitalisation. Again, pick from the top and skip duplicated sectors. That gives this top 10:

Company Sector Dividend P/E
Royal Dutch Shell Oil & Gas 6.0% 11.7
HSBC Holdings Banking 6.0% 11.8
Unilever Personal goods 3.1% 20.8
BHP Billiton Mining 9.7% 10.4
GlaxoSmithKline Pharmaceuticals 4.9% 14.2
Diageo Beverages 5.0% 22.6
British American Tobacco Tobacco 8.5% 8.5
Vodafone Telecommunications 7.9% 19.8
Prudential Insurance 3.3% 10.2
Carnival Travel & Leisure 4.1% 10.6
Average   5.8% 14.1

This time I think we’ve got a less volatile selection, and though the average dividend yield is lower, it’s still attractive at 5.8%. We’ve also missed out some stocks that I like. I’d seriously consider AstraZeneca, for example, as an alternative to GlaxoSmithKline, even with its dividends as low as 3.5%.

Just a start

Of these lists, I’d go for the high-yield one. But I’d temper it by leaving out individual companies I really don’t fancy — and I’d be tempted to replace them from the table of big market caps. An obvious switch to me would be to swap out Vodafone from the dividend list and go for GlaxoSmithKline from the market cap list.

I’d also probably replace HSBC with Lloyds Banking Group, as the latter has better dividend growth on the cards, better cover by earnings, and I think it’s super cheap on a P/E of seven. And I already own Lloyds shares.

Improvements

That hints at ways a simple start like this can be refined. We could, say, add a minimum dividend cover to our requirements, filter for dividend yields over, say, the Footsie’s current average of 4.5%, and then sort the list in market cap order. And we can try the same thing with other indexes like the FTSE 250.

I try variations like this all the time, so watch this space.

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Alan Oscroft owns shares of Aviva and Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca, Carnival, Diageo, HSBC Holdings, Imperial Brands, Lloyds Banking Group, Prudential, 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.