More often than not, if a FTSE 100 stock supports a dividend yield that’s significantly above the wider market average, it’s a strong sign that the market believes the payout is not sustainable.
However, this is not always the case. These companies with high single-digit dividend yields can be desirable long-term investments.
Here are a couple of FTSE 100 stocks currently support yields of 6% or more that I believe fall into this bracket.
FTSE 100 income stocks
Shares in life insurance company Phoenix Group currently offer a dividend yield of 6.7%. This payout is funded with income from the group’s life insurance and pension asset portfolios. The business generates profit by acquiring books of these policies at discounted prices. It can then use its economies of scale to push down costs and free up cash to return to investors.
This business model’s stability and predictability suggest to me that Phoenix’s dividend is incredibly safe despite its high level. There’s also scope for further growth in the years ahead as the company continues to consolidate the pension and life insurance market.
Shares in steel producer Evraz also offer a dividend yield of nearly 7%. This investment isn’t for the faint-hearted, however.
The steel industry is highly cyclical, which means Evraz’s profits can be unpredictable. That said, the company has an impressive track record of returning as much cash as possible to investors when times are good.
That’s why I believe this business could be an attractive income investment at current levels. Steel prices worldwide are surging, which implies Evraz may see rising profits in the months and years ahead. Shareholders could see increased dividends as the company reaps the benefits.
Talking of the steel price, one of the reasons why the cost of this essential commodity is rising is the rising price of iron ore, which is currently sitting at record levels. This is great news for FTSE 100 mining group Rio Tinto. The world’s largest iron ore producer, Rio has some of the lowest production costs in the world. That suggests to me that the business is currently generating substantial profits. Rising profits will support the company’s dividend yield, which currently sits at 6%.
Finally, I think it could be worth taking a closer look at British American Tobacco. Shares in this cigarette producer currently support a dividend yield of 8%.
Ethical considerations aside, as an income investment, I believe this FTSE 100 corporation is incredibly attractive. It has a strong track record of above-inflation dividend increases and is incredibly cash generative. Moreover, profit margins are some of the best on the market, and margins have gradually improved as the company has steadily increased prices.
Despite all of these attractive qualities, British American shares are currently trading at a forward price-to-earnings (P/E) multiple of just eight. I think that’s too cheap, especially considering its market-beating dividend yield and strong growth track record.
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Rupert Hargreaves owns shares in British American Tobacco. 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.