This time last year dividends were increasingly hard to come by on the FTSE 100 due to the pandemic and market crash. Now that dividend payments are coming back, who are the top payers? And even though they may have a high yield, what does that mean for now and beyond?
How do dividend yields work?
If a company decides to pay 5p dividend and its current share price is 100p per share, then its yield equates to 5%.
If this share price dropped to 50p, then that 5p dividend would represent a 10% yield. Investors are often buoyed by a higher yield, but may forget to examine the cause. Is the share price drop a sign of a firm’s diminishing ability to make dividend payments? Sometimes that can be the case. A high yield could be a sign of problems elsewhere in the business.
Whether I am looking into blue-chip stocks on the FTSE 100 or FTSE AIM small-caps for my portfolio, I always do my due diligence and research. I do like a dividend but I also dig deeper into many aspects of a company before investing. I want to check if performance, financials, and external factors will remain favourable in order for my chosen company to be able to pay a consistent dividend for my portfolio.
Continuing with the scenario mentioned above, even if a firm can still stretch to pay the dividend it committed to, it may not be the best option for shareholders in the long term. Can the firm I am interested in pay a consistent dividend next year and beyond or is it simply delaying facing any problems head on right now? This scenario is a general one I am using but not all cases are like this. The highest yielders aren’t always the most reliable either.
Top FTSE 100 dividend paying stocks
According to dividenddata.co.uk, the top two dividend paying stock on the UK’s leading index today are:
Tobacco companies like Imperial Brands have been a go-to for income seeking investors for many years. Despite relatively high and dependable dividend yields that are attractive to me, I do feel that these yields are hiding a cultural shift in smoking habits. Smoking rates are falling in many developed markets and sales of traditional tobacco products are falling too.
A hike in demand for steel has benefited Evraz in recent times as restrictions have eased in many parts of the world. Evraz has a hand in all forms of steel sales as well as its production so has been well placed to benefit. The risk involved is that commodities are at the mercy of many external factors such as political and economic fluctuations, such as the one created by the pandemic. This could affect it in the future and its dividend yield.
As a savvy investor, I am looking to generate an income from my investments. Despite some risks to the FTSE 100 stocks I have mentioned, they currently pay a good dividend and I believe they could for a long time to come. For that reason, I would happily add them to my portfolio.
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Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.