Finding income investments is particularly difficult right now. Many FTSE 100 companies have slashed their distributions to investors over the past 12 months. Other UK shares have followed suit to preserve their cash resources in the pandemic.
However, a handful of companies have stood by their distributions. While these payouts aren’t guaranteed, I’d consider these stocks when looking for income investments.
FTSE 100 income
Insurance group Admiral (LSE: ADM) is one of my favourite blue-chip income stocks. The company has a consistent track record of returning cash to investors. While there’s no guarantee the business will continue to return excess profits to shareholders, I think its business model can support its distributions.
Admiral is one of the largest car insurance companies in the UK. It’s also highly profitable. For the past six years, the company has reported an average operating profit margin of 37%. Unfortunately, insurance can be an unpredictable business. So, the group’s profit margin may not remain at this level indefinitely. That means the business’s dividend could come under pressure.
Still, I believe the company’s size gives it some protection against uncertainty in the insurance market. Therefore, I’m confident in the group’s dividend ability.
City analysts have pencilled in a dividend yield of nearly 6% for 2021. Even though this is only a rough estimate, and may turn out to be too optimistic, I believe it shows the FTSE 100’s firm’s dividend potential.
UK shares for income
Of the 100 shares that make up the lead index, only 18% support dividend yields of 5% or more. These projections are based on City analyst estimates so they’re by no means guaranteed. Nevertheless, I think the forecasts are a great way of weeding out the best UK shares for income.
One of the FTSE 100 companies projected to offer a dividend yield of nearly 6% in 2021 is mining group BHP (LSE: BHP).
This company is one of the largest mining conglomerates in the world. I think this comes with both benefits and drawbacks. For a start, commodity prices can be highly volatile. That means the corporation’s profits can jump around from year to year.
On the other hand, the biggest companies in particular sectors tend to have economies of scale, which means they can operate with lower production costs than smaller peers. That may translate into higher profit margins.
BHP could also benefit this year from rising commodity prices. One of the company’s main product lines is iron ore. It aimed to produce 276m-286m tonnes of the stuff in 2020. Towards the end of the year, the commodity, a vital ingredient in steel production, reached a multi-year high off the back of China’s strong demand.
I believe this should help support BHP’s bottom line and dividend. Although, as noted above, commodity prices can be volatile. There’s no guarantee the mining group will continue to generate large profits throughout 2021.
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Rupert Hargreaves owns shares in Admiral Group. The Motley Fool UK has recommended Admiral Group. 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.