There are a small handful of UK dividend stocks that offer yields of 9% or more. As an income investor searching for high yield, should I buy these for my portfolio?
In general, when the market values an income-paying security so lowly, it often means that the payout is expected to fall. That’s a fair warning, but I feel that these shares could be exceptions to this rule.
I’m confident in this payout
Tobacco stock Imperial Brands (LSE: IMB) won’t score highly with ethical investors. But it’s a big, profitable business with determined new management. CEO Stefan Bomhard is doubling down on the group’s core tobacco business and cutting back spending on more speculative new products.
This may sound like a backward strategy, given that global smoking rates have been falling for years. However, by controlling costs and maximising the value of brands such as JPS, West, and Gauloises, Bomhard believes he can deliver stable profits and modest dividend growth.
City analysts who cover the stock seem to agree. The latest consensus forecasts show dividend growth averaging 3% per year between now and 2023. Forecasts can change, of course, depending on future developments, and can’t be relied on.
Is this really a safe dividend stock?
I think it’s safest to assume that the tobacco business will remain in decline. Rival BAT expects global sales to fall by 3% in 2021. This adds risk to Imperial shares, because it’s impossible to be sure how quickly smoking rates will fall. This uncertainty makes it hard to value Imperial shares based on expected long-term earnings and dividends.
I can also see some risk that new legal regulations could hit tobacco sales in developed markets, although I feel this is probably less of a concern.
Imperial shares currently trade on six times forecast earnings and offer a 9.8% yield. Even with the risks involved, I think that’s cheap. I’d consider buying more of this UK dividend stock for my portfolio.
This 9.3% yield tempts me
The second 9%-er I’m looking at today is asset management group M&G (LSE: MNG). This business was spun out of FTSE 100 insurer Prudential in 2019, but M&G has a 170-year history as a savings and investment business.
It’s probably fair to say that M&G has not yet convinced investors that it can find a route to growth as a standalone business. Despite generating enough cash to support a generous dividend, the market doesn’t seem keen.
This is reflected in M&G’s valuation on eight times 2021 forecast earnings, with a dividend yield of 9.3%. That’s cheaper than most UK-listed rivals.
Like most of its peers, M&G saw fund outflows last year as investors withdrew money following the market crash. That’s fairly typical, but M&G doesn’t have the scale of some larger rivals.
What’s needed, in my view, is one of two things. Either M&G must bulk up to achieve economies of scale, or it needs to develop a more distinctive niche role. The most likely targets I can see are the UK retail and wealth management sectors, where M&G’s well-known brand could work well.
A dividend stock with a 9% yield will always come with some special risk or unusual circumstances. But I’d be happy to put my cash into M&G at current levels, as I believe the shares could perform well over the coming years.
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Roland Head owns shares of Imperial Brands. 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.