As an income investor, I’m always looking for the best dividend-paying stocks to buy. But last year’s widespread dividend cuts mean I’ve fewer choices than in the past.
Both of the FTSE 100 shares I’m looking at today boast 6% dividend yields. High yields like this aren’t common at the moment, but I feel confident these payouts should be sustainable.
This 6% yield is backed by cash
Telecoms giant Vodafone Group (LSE: VOD) is a big beast, with annual sales of around €45bn. After years of expansion, it’s now one of the biggest operators in Europe and Africa with a mix of fixed-line (broadband) and mobile networks.
CEO Nick Read is no longer on the acquisition trail. Instead, he’s working hard to consolidate the business into a more unified, efficient, and profitable operation.
However, even without the changes being made by Read, Vodafone already had one big attraction for me. This business generates a lot of cash.
Vodafone’s current dividend of €0.09 per share was covered twice by free cash flow last year. I expect this to continue, hopefully supporting a return to dividend growth.
What could go wrong?
One challenge is that Vodafone is an expensive business to run. Maintaining and upgrading the group’s telecoms networks currently costs nearly €8bn each year. That’s roughly equivalent to two years’ profits.
A second concern is that Vodafone’s European markets are fairly mature. Broker forecasts suggest the group’s revenue will only rise by about 2% in 2022 and 2023. I expect dividend growth to be similarly slow.
Despite these limitations, I’d still be happy to buy Vodafone shares for their 6% yield. As a pure income play, I reckon this is one of the best dividend-paying stocks in the UK market.
A turnaround opportunity?
FTSE 100 insurance group Aviva (LSE: AV) has some similarities with Vodafone. Its shares offer a 6% yield and the business is under the control of an energetic new CEO, Amanda Blanc.
Blanc is determined to improve the profitability and growth rate of the group’s core operations in the UK, Ireland, and Canada. Operations in other countries are mostly being sold. For example, Aviva recently announced a £2bn deal to sell operations in Singapore and Italy.
I believe Blanc could end up with a war chest of cash. Some of this could potentially be used to buy back shares or pay special dividends.
Is this really one of the UK’s best dividend-paying stocks?
However, one concern for me is that Aviva’s track record over the last decade isn’t that great. The insurer has consistently underperformed faster-growing rivals and made several dividend cuts.
As a result, Aviva’s share price is still 20% lower than it was 10 years ago. Shares in FTSE 100 peers Prudential and Legal & General have both doubled over the same period.
A history of disappointing performance may be one reason why Aviva shares currently trade on just seven times forecast earnings and offer a 6.3% yield. I suspect the market wants evidence of growth before re-rating the stock.
However, I think Aviva’s current valuation reflects this cautious outlook. If results improve, I’d expect the shares to rise. If not, I believe they should continue to offer a reliable 6% yield. In either case, this is a dividend share I’m happy to own.
