One decent investment strategy involves buying shares to harvest their dividend yields.
I could collect the dividends as personal income or reinvest them with the aim of keeping my investment pot growing.
But key to the strategy is the sustainability of dividend payments. Company directors have the freedom to raise, lower, cancel or suspend shareholder dividend payments according to trading conditions and other factors. So, I’d want to be confident dividend payments are well covered by cash flowing into the underlying business. And I’d attempt to analyse the potential of a business to keep on paying dividends in the years ahead.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
FTSE 100 stocks with big, growing yields
My ideal dividend investments would be in companies that raise the dividend a little each year. Usually, that means revenue, earnings and cash flow will tick higher annually because the business is trading well.
So, with that in mind, should I buy shares in the following 5 FTSE 100 companies that each have a dividend yield above 5%?
|
Stock |
Recent share price |
Forward-looking dividend yield |
|
EVRAZ |
515p |
8.8% |
|
Persimmon |
2,716p |
8.6% |
|
Imperial Brands |
1,650p |
8.7% |
|
SSE |
1,547p |
5.5% |
|
Legal & General |
265p |
6.9% |
EVRAZ is a steel, mining and vanadium business with operations in the Russian Federation, the US, Canada, the Czech Republic and Kazakhstan. As such, operations are cyclical in nature and we can see that playing out in the patchy record for revenue, earnings, operating cash flow and shareholder dividends.
The stock is flying high right now and the business is generating rising projected earnings and a chunky dividend. But there isn’t the long-term stability and steady growth I’m looking for with my dividend investment strategy. So, I’d avoid EVRAZ when it comes to my dividend portfolio.
Housebuilder Persimmon is another company operating a business in a cyclical sector. Dividends are high and rising now, but valuations and share prices in the sector can be erratic, sometimes leading to lacklustre shareholder returns overall. So, for this strategy, I’d avoid the stock.
Composite insurer, savings and investment business Legal & General has been trading well for several years. And the company has done a good job maintaining and raising its dividend. But I can’t deny the inherent cyclicality in much of the business. Because of that, the stock doesn’t make the cut for my long-term dividend portfolio.
Defensive sectors
Smokers’ products manufacturer Imperial Brands operates in the wider fast-moving consumer goods sector. That’s an attractive, defensive sector to me and IMB’s record of strong and generally rising cash flow suggests dividend payments are sustainable with the potential to grow. I would buy this stock for my dividend portfolio, despite risks such as declining smoking rates in the developed world.
Electricity company SSE is another that would make it into my dividend portfolio. It has faced challenges in the past (lower earnings, rising debt). But it sold its retail business for £500m, its cash flow is strong and I reckon there’s potential for the dividend payment to grow in the years ahead. The sector is traditionally seen as defensive and the company looks well placed within it.
