As a long-term value investor, I seek three things when buying shares. First, to invest in good companies (usually FTSE 100 and FTSE 250 firms) at reasonable prices. Second, to make capital gains — that is, profits from selling shares at higher prices. Third, to buy stocks with market-beating dividend yields for income.
I love cash dividends
Dividends are regular cash payments made by companies to shareholders. However, these cash returns aren’t guaranteed, so future payments can be cut or cancelled at any time.
Of the 1,929 or so companies listed in London, most don’t pay out dividends. Some firms are loss-making, while others prefer to reinvest their profits to boost future growth.
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That said, hundreds of companies in the FTSE 350 index do pay cash dividends to their owners. And that’s why this index is my happy hunting ground for market-beating cash returns.
The Footsie’s five highest dividend yields
In my frequent searches for undervalued and unloved shares, I often screen for stocks based on their dividend yields. Ideally, I’m looking for companies whose cash yields beat that of the wider FTSE 100 (at around 3.7% a year).
Happily, there are around 20 Footsie shares whose dividend yields exceed that of the wider index. For the record, these are the five highest-yielding shares in the FTSE 100 today:
| Company | Business | Market value | Share price | One-year change | Five-year change | Dividend yield |
| M&G | Asset manager | £4.7bn | 200.05p | -7.1% | -12.1% | 9.8% |
| Phoenix Group Holdings | Insurance | £5.7bn | 574.12p | -7.9% | -18.9% | 8.9% |
| Vodafone | Telecoms | £24.3bn | 89.94p | -30.0% | -57.1% | 8.6% |
| British American Tobacco | Tobacco | £65.1bn | 2,913p | -12.1% | -27.1% | 7.7% |
| Legal & General Group | Asset manager | £15.1bn | 253.53p | -8.7% | -5.8% | 7.6% |
These five shares pay cash yields of between 7.6% and 9.8% a year. That’s roughly two to three times what I could earn in interest from a savings account. However, savings are very safe, while shares can be risky.
The super-heavyweight among the five is British American Tobacco. With a market value of over £65bn, it’s larger than the other four firms combined (at £49.9bn). I’d gladly buy into this high-yielding behemoth — but my wife won’t allow tobacco stocks in our family portfolio.
The second-largest company is telecoms giant Vodafone Group, whose shares offer a yearly cash yield of 8.6%. My wife and I added this stock to our portfolio in December as a strong ‘buy and hold’. We also own stock in Legal & General Group, again for its income-generating ability.
The two remaining shares, M&G and Phoenix Group Holdings, offer the two highest yearly dividend yields, at 9.8% and 8.9%, respectively. I don’t own these stocks, but they’re on my buy list.
Which would I buy today?
To be honest, I’d gladly own stakes in all five of these FTSE 100 firms (except BAT, of course, for the reasons above). The average dividend yield across all five is a handsome 8.5% a year.
All five shares have fallen over one year and five years, driving up their dividend yields. Worst hit is Vodafone, whose stock has dived by three-tenths over 12 months. And this fall is part of the reason my wife bought these shares.
Finally, history has taught me that ultra-high dividend yields can be red flags. For example, analysts expect M&G to reduce its payout this year. But I’m happy to ride this risk in the years ahead!
