A fair few UK dividend shares today are carrying abnormally high yields. That means I can invest in them right now and hope to achieve extremely attractive levels of passive income.
Thinking long term
Capital allocation is essentially a fancy business term for deciding what money goes where. It means investing a company’s financial resources in ways that will increase its efficiency and (ideally) maximise profits.
For me, I think allocating most of my monthly savings towards high-yield UK shares right now makes sense. That’s because while rates for savings accounts have risen sharply, they’re unlikely to still be paying me a rising passive income in five or 10 years’ time.
However, if I invest in the right dividend shares today while they’re cheap, those investments could indeed still be paying me rising income years down the line. And I like the sound of that.
Discounted shares
I think it’s fair to say that UK shares are dirt-cheap right now. Based on a forward-looking P/E ratio, the blue-chip FTSE 100 currently trades at a 35% discount to the MSCI World Index. And these weak share prices have helped push dividend yields up to eye-catching levels.
For example, scanning the FTSE 100 right now, I can see nearly 20% of the index in the 6%-10% yield range. You’d have to go back to the 2007/08 financial crisis almost a generation ago to see this.
But just because shares are cheap, that doesn’t mean I should buy them all. It’s important to consider each stock on an individual basis.
No red flags
The share price of Legal & General (LSE:LGEN) has fallen 21% in two years. And this weakness, coupled with the insurance and pensions giant regularly upping its dividend, has meant the yield has risen dramatically. It now stands at 8.8%, with an incredible 9%+ yield forecast for next year.
Normally, I’d expect to see this from an oil or mining stock, where the yield is based on historic earnings that are due to fall off a cliff (along with the dividend).
But that doesn’t appear to be the case here. There have been no distress flares fired from management and the insurer has reiterated its intention to grow the dividend at 5% a year until its 2024 fiscal year. The payout looks to be reasonably well covered.
The firm’s first-half operating profit was £941m, only slightly below the previous year, despite high interest rates providing headwinds for its investment management division. That’s a resilient showing.
Now, there are risks. One is that chief executive Sir Nigel Wilson is due to retire at the end of the year. We don’t know what direction new management might take regarding dividend policy. This adds an element of uncertainty, though not enough to stop me adding to my holding again this month.
I’d act now
Looking ahead, I expect capital to flow back into equities from cash as inflation tapers off and interest rates begin to fall. Plus, I’ve noticed a few analysts turning bullish on UK stocks for the first time in many moons.
To my eye then, the opportunity to secure this level of passive income might not be around for too much longer. So I intend to take advantage while I can.
