As a veteran value, income and dividend investor, I’m always scouring the stock market for undervalued shares. Ideally, I’m hunting lowly rated stocks in the FTSE 100 and FTSE 250 indices.
Three high-yielding shares
I aim to make money from shares in two ways. First, from capital gains — profits made by selling shares at higher prices. Second, from cash dividends — regular payouts made by companies to shareholders.
In my latest FTSE 100 screening, I found three dividend shares I don’t yet own. I’d gladly buy all three, but lack the cash to do so for now.
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Instead, I have added all three stocks to my watchlist for future buys. Here they are, sorted from highest to lowest dividend yield:
| Company | Sector | Share price | Market value | Dividend yield | One-year change | Five-year change |
| M&G | Financial | 203p | £4.8bn | 9.7% | -7.9% | -9.9% |
| Phoenix Group Holdings | Financial | 589.2p | £5.9bn | 8.6% | -4.2% | -15.8% |
| abrdn | Financial | 207.5p | £4.2bn | 7.0% | +9.9% | -49.9% |
All three companies are smaller FTSE 100 players, with market values of £4bn to £6bn. And all three offer huge cash yields, ranging from 7% to nearly 10% a year.
So what’s my problem?
I can see three problems with buying all of these high-yielding shares.
First, these stocks are all in the financial sector. In fact, these three companies are very similar, in that they are all asset managers and insurers. If this market sector got into trouble, then all three shares could dive together.
Second, they’ve all been long-term lemons. Over five years, their share prices have declined by between a tenth and a half. Over the same period, the FTSE 100 has gained 2.9% (all figures exclude dividends).
Third, investing in shares purely because of enticing and market-beating dividend yields can sometimes fail miserably. In my experience, the higher the cash yield, the higher the risk — generally speaking. This is especially the case for yields into double digits.
We can take the risk
Despite these concerns, I will probably buy one, two or all of these high-yielders when my next cash windfall drops. That’s because my wife and I are keen to add more passive income to our family portfolio.
For example, buying £10,000 of each stock would cost £30,000. From this pot, we could expect to receive dividends of around £2,532 a year. That’s an ongoing annual cash yield exceeding 8.4%.
Of course, shares are very much riskier than cash (which is largely considered a risk-free asset). But such a high yearly yield seems to me decent compensation for taking the risk of losing money.
Likewise, future dividends aren’t guaranteed. They can be cut or cancelled at any time. Indeed, scores of leading companies did this during the pandemic panic of 2020-21.
Summing up, over nearly four decades of investing, dividends have been a core part of my long-term returns. But I also know that dividend investing can still go wrong!
