All a FTSE 100 investor has to do to be successful is to beat the average return of the market.
It’s certainly easier, in theory, to do that with 10% dividend-paying shares than those that pay 1%. Here I’ll look at the three highest-paying dividend shares on the FTSE 100. But which are value traps, and which offer the best prospects for long-term compound interest gain?
Tobacco giant Imperial Brands (LSE:IMB) has long paid the highest dividend of any FTSE 100 company. At current count, it stands at 10.6% on a price-to-earnings (P/E) ratio of 7.6. But the share price has taken a battering, cratering 45% in the last three years.
Where did it all go wrong? IMB thought they had swerved stricter regulation on smoking by investing heavily in vaping. But this bright future has turned into a nightmare as countries across the globe clamp down and ban e-cigarettes.
City analysts like the influential RBC Capital Markets remain “very wary” for the medium to long term, given the uncertain regulatory environment globally. Whoever takes over from 20-year veteran chief executive Alison Cooper after she steps down this year has a hell of a turnaround project on their hands. I would avoid it.
With Jeremy Corbyn’s shock plan to nationalise Openreach and give away free broadband dead and buried, BT (LSE:BT.A) can get back to the business of operating the largest phone and internet infrastructure in the UK.
An 8.95% dividend on a P/E ratio of just 6.5 might sound like an immediate buy, but investors should be wary. The BT share price has dropped more than 10% since the start of January. The fallout from a disappointing set of half-year results in October 2019 — with revenue down 2% and profits 3% underwater — is still ongoing.
There are also serious long-term concerns about the state of BT’s £8.3bn pension shortfall. Previous boss Gavin Patterson gave the go-ahead to repay hundreds of millions of pounds every year for the next 10 years. £2.85bn was paid in 2018, £1.25bn in 2019, with plans for £400m in 2020, £700m in 2021 and 2022, and £907m every year from 2023 to 2030. Clearly this will impact heavily on profitability for at least the next decade. I would avoid BT.
Of the shares on this list, SSE (LSE:SSE) is the only one I’d consider.
A dividend of 6.4% on a P/E ratio of 22 looks very attractive to me, given where the company is going. Dropping out of the Big Six UK energy providers and selling off one of its major assets doesn’t concern me at all. In fact it’s the main reason I’d buy SSE.
Getting newcomer Ovo Energy to pay £500m for its 3.5 million home electricity customers was a masterstroke given the falling revenue and tighter margins in this part of the business. It has refocused instead on the booming renewables market by owning and operating offshore wind farms in Scotland, England, and Ireland.
This month analysts Goldman Sachs re-rated SSE higher, noting the “major step-up in public awareness of climate change issues…likely to provide 30 years of growth and regulatory stability“. SSE has “derisked its business model towards more visible activities,” it added.
SSE is the only one of these top three dividend-paying FTSE 100 companies really able to achieve sustainable growth for the next three to four decades, in my opinion.
Tom Rodgers has no position in 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.