Covid-19 was declared a pandemic by the World Health Organization (WHO) last week and stock markets crashed following that move. Policy responses such as quantitative easing and increased government spending should hold the FTSE together in the days ahead. But the fact is, no one’s certain how long this situation will last. What’s certain is that some sectors will be harder hit than others in the coming days. I’d bear this in mind when I invest for dividend yields.
Badly hit by the stock market crash
This is a good time for income investing with dividend yields at very attractive levels. Of FTSE 100 stocks, 16 offer over 10% yields at present. At least some of these, however are avoidable for now. Consider, for example, FTSE 100 travel stocks TUI and Carnival, both of which have been hit hard by restrictions on people’s movement. Both offer high yields, of 12.5% and 12.3% respectively. But I don’t know now if they will be able to sustain dividends in the long term. I’d much rather wait a little longer and see how things play out for this segment.
Good dividend yields and good prospects
Stocks like the multi-commodity miner Glencore and the insurance biggie Aviva look like good bets however. I flagged both of them as potential buys last week, and their yields look even better now at 12.5% and 11.3% respectively.
I also like the FTSE 100 miner Rio Tinto, which has a dividend yield of 10.2% now. Its share price has fallen by 24.3% since the start of 2020 (which also explains the high yield), but that’s still less than the fall in the FTSE 100 index of 29.4%. This says something about investor faith in the stock.
The contrarian bets
For investors who don’t mind an occasional contrarian buy, there are at least three FTSE 100 stocks that offer rich rewards. Two of these are the big FTSE 100 oil companies Royal Dutch Shell and BP, which offer dividend yields of 13.6% and 11.9% respectively at current prices.
These have been hit by a double whammy of the coronavirus-driven stock market meltdown and the sharp fall in oil prices. At the time of writing this, the Brent crude price was likely to end the week with a 24% fall to $33.40, according to CNBC, making it the worst fall since December 2008. With the global economy looking uncertain again, oil prices may well remain weak for the foreseeable future. Both poor demand and prices are bad news for oil producers.
I’ve been slightly doubtful about both RDSB and BP given their poor recent financial results. But the fact is that both are also dependable income stocks. Even if they were to cut dividends, their yields could still keep the income investor quite happy. Over the longer term, of course, the future of big oil has a big question mark around it. For now, however, they’re still stocks to watch. The FTSE 100 real estate developer Persimmon, which has an almost 11% yield is also one I’d consider. It’s a unique buy that offers both capital growth and a high dividend.
