I believe that buying high-yield dividend stocks is a great way to generate an investment income.
In this article I’m going to take a look at three FTSE 100 stocks which each have a forecasted yield of at least 5%. Although dividend payments are never guaranteed, I believe all three shares could be good choices for investors building an income portfolio.
This spin-off looks too cheap to me
My first choice is fund manager M&G (LSE: MNG). Until about two weeks ago, this business was part of FTSE 100 insurance group Prudential. A long-awaited spinout has now separated the two, leaving PRU shareholders with an equal number of MNG shares.
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Asia and US-focused Prudential is all about growth, with a relatively low 3% dividend yield. In contrast, UK-focused M&G is more mature, but generates plenty of surplus cash.
For income investors, I think this split could be an opportunity. Although M&G is new to the stock market, it’s a long-established business that’s big enough to go straight into the FTSE 100.
The market isn’t yet convinced, and M&G shares currently offer a forecast yield of 8.5% for 2020.
I think this stock would be fairly valued with a yield of between 6.5% and 7%, in line with rivals.
That would imply a share price of about 270p – about 24% above the current share price of 218p. I see M&G as a good buy at current levels.
I rate this industry leader
German travel group TUI (LSE: TUI) is the world’s largest tourism operator, taking more than 27m people on holiday every year.
TUI has been suffering its own problems this year, thanks to softer market conditions and to costs resulting from the global grounding of Boeing 737 MAX aircraft. However, the failure of Thomas Cook has helped rival operators, including this FTSE 100 heavyweight.
I’ve been cautious about TUI recently, but I’m starting to think the balance may have shifted in favour of the £6bn firm. Analysts expect the dividend to be cut this year before returning to previous levels in 2020. These forecasts give the stock a forecasted 2019 yield of 4.5%, rising to 5.9% for 2020.
There’s some risk here, as a UK or European slowdown could hit sales next summer. But I think the stock looks sensibly valued at current levels and is worth considering as a buy.
A 6% yield with growth potential
Motor insurer Admiral Group (LSE: ADM) has been a stunning investment for long-time shareholders. The shares have doubled since September 2013 and risen four-fold since July 2006. Alongside this, the company has developed a track record of paying generous – and sustainable – dividends.
Admiral’s business model is slightly unusual, as it reinsures a large proportion of its policies, reducing the amount of cash it needs to hold against possible claims. Historically, this has resulted in high levels of surplus cash being available each year for special dividends.
This process has also made the firm unusually profitable, with a return on equity of more than 50%. A more typical value for a decent UK motor insurer might be 15%–20%.
Growth has slowed a little in recent years, but I think this remains an excellent business. Analysts expect a dividend yield of 6% this year. I’d be happy to pick up some of these shares and tuck them away in my income portfolio.
