The relentless rise of asset prices since the global financial crisis of 2007–09 has given one group of investors a huge headache. With interest rates near zero or even negative and with asset values through the roof, income yields have collapsed. Today, it’s impossible to earn a decent yearly income or yield without taking risks. This ‘financial repression’ driving investors to buy risk assets has an acronym. TINA — There Is No Alternative — to buying shares for higher dividends.
For a high passive income, grab big dividends
Yearly interest from ultra-safe savings accounts and high-quality government bonds runs at 1% or less. In the Eighties and Nineties, you could get 10% a year from these assets, but never again. Instead, I’d seize the chunky cash dividends on offer from the FTSE 100‘s biggest payers.
Check out these two fat cash payouts
With the FTSE 100 off to a great start to 2021, the index’s dividend yield has declined to 3.1% a year. That’s a multiple of the income yield from safe assets, but I can do much, much better. I calculate that 30 FTSE 100 members offer dividend yields above that of the wider index. Right now, the Footsie includes a dozen companies paying cash dividends of 5%+ a year. Here are two of the highest dividend yields on offer from blue-chip companies today.
M&G pays 9% a year
Investment manager M&G (LSE: MNG) was spun out of its parent company Prudential on 21 October 2019. Its shares then suffered the roughest of rough rides in 2020, crashing as low as 84.12p on 18 March. As I write, they trade at just over 199p, valuing the group at £5.2bn. I’ve written about M&G multiple times and, on 30 September, I said its shares were a real bargain below 160p. Even after climbing by a quarter (25%) in three months, M&G shares still offer a massive dividend yield.
At today’s price below £2, M&G shares offer a bumper dividend yield of 9% a year. Yet M&G is a safe, solid, and even boring UK and European asset manager in rising stock markets. What’s more, the group plans to generate excess capital of £2.2bn over three years. Most of this will end up in M&G’s shareholders’ pockets. That’s why I see M&G as a compelling buy today for an income-oriented portfolio.
Imperial Brands pays an 8.4% yearly dividend
Imperial Brands (LSE: IMB) is the world’s fourth-largest manufacturer of cigarettes and tobacco. Clearly, this dividend share is not for ethical or socially conscious investors. But Imps (as it’s known in the City) has a long pedigree and generates huge cash flows from sales worldwide. Bristol-based Imperial is 120 years old, employs 32,500 people, has 38 factories across the globe, and sells 330bn cigarettes a year in more than 160 countries. It also had a decent 2020, as cigarette sales rose during lockdowns.
In September 2016, Imperial’s share price peaked at over £41. As I write, it trades around 1,636p, valuing this business at £15.5bn. Today, Imperial’s dividend is a whopping 8.4% a year, the third-highest in the FTSE 100. And that’s after being cut by a third on 19 May last year. With a quarterly pay-out of 2.1% in cash, Imperial is a core holding for generating passive income. That’s why I’d happily buy this dividend dynamo today, ideally inside my ISA for tax-free returns!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Prudential. 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.