Super-high dividend yields are always tempting. There’s plenty of choice at the moment, too. As I write, there are seven FTSE 100 shares with forecast yields over 9%.
As an income investor, should I be buying these high yielders for my portfolio? It turns out that I do already own some of these shares. But there are others I wouldn’t buy. In this piece I’m going to look at five of these stocks and explain what I’d do today.
Big miners
The three highest yielding shares in the FTSE 100 today are all big miners. The two biggest UK-listed players in this sector are Anglo-Australian miners Rio Tinto and BHP. Rio’s 2021 forecast yield is 16%, while BHP shares boast an expected yield of 11% for the current financial year.
Both groups make most of their money from giant iron ore mines in Australia. These have production costs of less than $20 per tonne. When the iron ore price surged to more than $200/tonne earlier this year, Rio and BHP made out like bandits.
It was too good to last. Over the last two months, fears that the Chinese property market will slow have calmed the market. Iron ore has fallen by nearly 50%, to around $120/tonne. Rio and BHP are still highly profitable at this level, but things aren’t like they were.
Shares in Rio and BHP have both fallen by around 25% in recent weeks. But in my view, shares in both companies still look quite expensive by historical standards. I think they’ve got further to fall.
Broker forecasts suggest dividends from Rio and BHP could halve over the next two years. I’m avoiding both stocks for now.
Big FTSE 100 dividend shares I’ve bought
The next two stocks on my list are both members of my share portfolio. Let’s start with tobacco group Imperial Brands.
Tobacco firms aren’t popular with investors anymore. Growth opportunities are limited. Ethical and regulatory concerns are a constant risk. This situation has left Imperial stock trading on just six times forecast earnings, with a well-covered 9.4% dividend yield.
I don’t expect much growth from my Imperial shares, but I do think this 9% yield should be safe for the foreseeable future.
Housebuilder Persimmon is another interesting situation. I’ve got concerns about the housing market, but while employment stays high and mortgages are cheap, I think we’ll avoid a crash.
If I’m right, Persimmon may offer good value at current levels. The stock’s 9.3% dividend yield is covered by forecast profits and supported by the group’s £1.3bn net cash balance. I don’t expect to hold Persimmon shares forever, but I’m comfortable with this holding at the moment.
The final 9%er
I’m going to wrap up with a financial stock. Fund manager M&G is a well-known name in the UK, but it’s not proved popular with investors due to lacklustre growth figures.
I can see the risks, but I think this negative sentiment may be overdone. M&G’s half-year results showed adjusted operating profit up 6% to £327m, with record funds under management of £89.7bn. Forecasts for a 2021 dividend of 18p per share look reasonable to me and suggest a 9% yield.
I don’t own M&G in my portfolio, but I would consider buying this FTSE 100 share for its yield.
