Are you staggered by some of the yields available from top FTSE 100 stocks? I certainly am. The fact that I can pick out three companies yielding more than 7% in the blink of an eye is quite something. That kind of income will quickly roll up.
Let’s say I invest £10,000 in one of them. After five years, I will have £14,026, even if the share price does not grow at all in that time.
After 10 years, my money will have grown to £19,672, excluding all share price growth. If the stock still yields 7% by then, I will be getting a yield of 13.77% based on my original £10,000. These are crude calculations, but they show how yields matter for long-term investors. Just remember, dividends are not set in stone.
The first 7% yielder I like is £16.7bn insurance giant Aviva (LSE: AV). I think this is a terrific income stock with a blistering forecast yield of 7.6%, covered 1.9 times by earnings. However, it has been a rotten growth stock, with the share price trading 15% lower than five years ago.
I have repeatedly been underwhelmed by Aviva’s share price, especially since it seems nicely priced to outperform, trading at just 6.9 times forecast earnings. As Kevin Godbold points out, Aviva is a cyclical stock with bumpy cash flow, and debt of £9.42bn in 2018. However, a sky-high yield and dirt-cheap valuation is always a difficult combination to resist. I’m hoping the current leadership shake-up may inject fresh energy.
Travel giant TUI Travel (LSE: TUI) has seen its share price halving over 12 months, while the yield has shot up as a result. Bargain hunters will be tempted, with the stock now valued at just 7.5 times earnings, which offers plenty of scope for a recovery.
Brexit uncertainty, sterling weakness and Spanish overcapacity hit the group, while last month it alerted markets that it could take a €200m hit from the grounding of its Boeing’s 737 MAX aeroplanes over safety concerns.
That could cast a shadow over its share price for some time while Rupert Hargreaves has warned of a possible share price cut if the problems continue. Right now, it looks riskiest of the three, but travel and tourism will only grow and I’d suggest brave investors buy at today’s low entry price then forget about short-term turbulence, as the TUI share price is ultimately heading for sunnier climes.
British American Tobacco
Tobacco stocks have long been one of the best sources of reliable dividends, and British American Tobacco (LSE: BATS) certainly fits that mould. The £70bn behemoth is up 25% over the past three months, although it still trades 40% lower than two years ago, as it has come under intense scrutiny from US regulators, which have been targeting big tobacco’s vaping and e-cigarettes operations.
The long-term decline of smoking in the West looks set to continue, with US cigarette volumes down 8.8% over the last year, Nielsen data shows. I believe the health message will ultimately spread to wealthy emerging market smokers too, but for now British American Tobacco continues to generate huge revenues, with more than $25bn expected this year.
Earnings are forecast to grow 5% this year and 7% next, and a yield of almost 7% with cover of 1.5 is still hard to resist.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.