If I had to start investing today with £500 in shares, I’d aim to put them in a safe stock that reaps high dividends, because it would grow my capital base. To find safe stocks, I’d look at those companies that are big enough and financially sustainable enough to ensure a steady increase in income.
This means looking at FTSE 100 companies that offer a yield that is higher than the average yield of this entire set. As I write, FTSE 100 shares’ average return stands at 4.3%.
Not all high-yielders are made equal
There are exactly 30 companies with a higher yield than that. I’m not convinced of all of them, however. For instance, the Russian miner Evraz,which offers a yield of 14.5%, the highest available in the set. But the company itself is in a bit of a funk right now and that’s part of the reason its yield is so high.
I’d consider tobacco biggie Imperial Brands (LSE:IMB) more closely because of its 11.5% yield at the end of the financial year 2019. It’s true that IMB’s share price tumble is one of the reasons for this. But it’s exactly that – just one of the reasons.
The company’s level of dividends has also been on the rise. It increased the dividend payout by 10% in the year, compared to 2018. Dividend yield is the actual dividend paid divided by the share price at the end of the year.
So it’s the combination of the higher dividend payout with the share price fall that is responsible for the higher yield. If the actual dividend level was the same as 2018, the yield would be 10.4%, or more than 1 percentage point less than that today.
IMB has seen rising revenues over the years, and even though its profits’ growth is less consistent, it has managed to remain profitable. I think that it’s a good idea to consider it for dividends alone.
There’s a catch here though. IMB has now abandoned its policy of increasing dividends by 10% every year and instead is looking to tie them to its profits. With a decline in profits, this doesn’t bode well for dividends. So why am I even suggesting this share to the investor?
It’s the price. There are too many disruptive changes taking place in business today, and big tobacco is hardly insulated from them, with smoking alternatives gaining in popularity. Imperial’s share price has been hit by these changes, and is down by more than 10% from last year.
With greater certainty in the stock markets now, I reckon IMB’s share price will start rising soon enough. It has already started rising in the past two weeks. This is a good time to buy it purely for capital growth, and if dividends are sustained, it’s a double positive for investors.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.