Buying FTSE 100 stocks with high dividend yields is one of the best ways to improve your income prospects.
However, not all dividend stocks are created equal. Some have much better income credentials than others.
With that in mind, here are two companies that offer both high dividend yields today, and the potential for dividend growth over the long term.
Shares in mining conglomerate BHP (LSE: BHP) have some of the best income credentials in the FTSE 100.
During the past few years, this enterprise has transformed itself. It used to be dependent on debt and wasted tens of billions of dollars on large mining projects, which didn’t produce attractive returns.
This strategy ended up in a $6.4bn loss for the group in 2016. Since then, management has prioritised efficiency, cash generation, debt reduction and sensible growth.
As a result of these efforts, BHP’s net debt has plummeted, and cash returns to investors have surged.
At the time of writing, the stock supports a dividend yield of 6.3%. On top of this, shares in the mining conglomerate are trading at a price-to-earnings (P/E) ratio of 10.8. This seems to suggest that the stock offers a wide margin of safety at current levels.
Moreover, in recent years the company has been distributing special dividends to investors if cash generation outperforms expectations. As such, there’s a good chance the total dividend yield could exceed current forecasts if BHP’s profits come in ahead of internal projections in its current financial year.
RSA Insurance Group
The other FTSE 100 stock that also stands out as an income investment is RSA Insurance Group (LSE: RSA).
Just like BHP, this insurance group has been through a rough time. However, it has come out the other side with a much stronger balance sheet and a renewed focus on returning cash to investors, rather than chasing unprofitable growth.
The stock currently offers a dividend yield of 4.2%. This could hit 5.2% next year, according to analysts’ current forecasts. Further, shares in the international insurance group are dealing at a P/E of 13.7 and PEG ratio of 0.8. These numbers imply shares in RSA could offer growth at a reasonable price for investors.
There has also been some speculation that RSA could offload its international firms in 2020. The company has operations in Canada and Scandinavia, which give it some international diversification. These businesses are also significant contributors to the bottom line and growing steadily.
Nevertheless, a sale would unlock capital, which would give management extra firepower to double down on RSA’s core UK market. The group could also return a significant amount of cash to shareholders in the event of a significant disposal.
Therefore, considering RSA’s valuation, the stock’s dividend and potential for special payouts if disposals go ahead, it could be worth adding this company to your long-term income portfolio.
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Rupert Hargreaves owns no share 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.