Buying shares with juicy dividends can offer attractive passive income streams. But some high-yield shares are also high risk. That does not appeal to me.
However, I see an opportunity in the current stock market turbulence. It has pushed down the prices of some blue-chip companies I think have strong dividend prospects.
Here are three firms whose share prices are all cheaper than a year ago (although in the case of the first one, the fall is so slight as to be negligible). All of them raised their annual dividend payout last year by between 5% and 7%. All are FTSE 100 members. On top of that, the dividend yield right now for each of them is higher than 7%.
If I wanted to target £1,000 in annual dividends, I would do it by taking advantage of the current market uncertainty. I would invest £12,100, spreading it evenly across these three shares. I already own two of them and would be happy to buy the third today if I had spare cash to invest.
British American Tobacco
Tobacco is a simple business. Cigarettes are cheap to make, consumed in huge volumes and can be sold at a high price. Owning premium brands such as Lucky Strike enables British American Tobacco (LSE: BATS) to charge a price premium that helps fund huge cash flows.
Can the formula last? After all, cigarette volumes remain huge but are in ongoing long-term decline. I see that as a risk, but think the company’s pricing power, core customer base and growing non-cigarette revenues could help British American to keep doing well.
The shares have a 7.3% dividend yield and British American grew its dividend last year by 6%. That is the latest in decades of annual increases for these high-yield shares. The company has indicated it plans to keep increasing its payout yearly although, in reality, dividends are never guaranteed at any company.
Legal & General
Another firm that has set out a plan for ongoing annual increases over the next several years is financial services powerhouse Legal & General (LSE: LGEN).
Last year, the dividend grew by 5%. Currently, these blue-chip shares offer an 8% yield.
I see the company as well-positioned for ongoing profitability. It operates in a sector with robust customer demand, its brand is well-known, and deep experience in financial markets means the business can benefit from substantial expertise.
There are risks, of course. Market turbulence, like that seen in recent days, can lead investors to pull money from the markets, something that could hurt profits and revenues in the financial services sector.
But I think Legal & General could continue to be a strong income generator over the long term.
M&G
The asset manager M&G announced last week that its annual dividend was to be increased by 7%. That means these high-yield shares currently offer me a 9.5% annual return in the form of dividends. The company’s policy is to aim to maintain, or raise, the dividend annually.
I see a risk of investors withdrawing funds could lead to less assets under management, generating fewer fees. But I think M&G can benefit from its large customer base in over two dozen markets, coupled with a strong brand.
