A 10% return on investment doubles money every seven years. Perhaps more incredibly, a 10% return over 24 years leads to a 10 times return on the original sum. With large multipliers on offer, it’s hard not to pay very close attention when the FTSE 100 throws up such big dividends.
The Footsie has been in an odd place recently. Dividends are rising, earnings too, but share prices seem to be going backwards.
The index might be set for another down year. However, strangely cheap prices might throw up a few golden opportunities – for now, at least.
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Three stocks
As I write, three stocks offer a dividend yield of 10% or higher – Vodafone (LSE: VOD), Phoenix Group (LSE: PHNX) and British American Tobacco (LSE: BATS). Three falling share prices have led to three weighty dividends here.
In my view, one of these stocks is a bargepole type. I won’t be going anywhere near it. But one, I think, is an excellent buy that’s already in my portfolio.
| Dividend yield | Dividend cover | Years increasing | 10-year dividend growth rate | |
| Vodafone | 11.07% | 1.2 | 0 | -2.10% |
| Phoenix Group | 10.62% | 1.6 | 7 | 2.53% |
| BAT | 10.01% | 1.6 | 26 | 4.95% |
Looking at the table above, a few things become clear. For one, the Vodafone dividend looks under threat. It’s slowly decreasing and stayed level last year. A share price that’s fallen 32% since February doesn’t surprise me. Investors are avoiding this one.
The Phoenix and British American Tobacco (known as BAT) dividends look much stronger. A well-covered and increasing dividend are two of the first things I look for. But before I make a judgement, let’s take a quick look at the forecasts.
| Dividend Yield | 2024 forecast | 2025 forecast | |
| Vodafone | 11.07% | 11.46% | 10.03% |
| Phoenix Group | 10.62% | 10.76% | 11.09% |
| BAT | 10.01% | 10.36% | 10.81% |
Okay, now we have a more complete picture. Firstly, analysts expect the Vodafone dividend to decline. With a mountainous debt pile and poor returns on capital compared to competitors, this is a stock I’m avoiding. An 11% yield might look attractive, but I see it as a value trap.
Best 10% yield
Phoenix looks much stronger and I’m tempted to buy now to lock in those big dividends. My concern with this stock is its sector. Finance firms are notoriously difficult to understand, and I’m not overly keen to invest in companies which shift around a balance sheet of hundreds of billions.
BAT has problems too, centred around the long-term decline of smoking. The prospect of a cigarette-free world was highlighted by Rishi Sunak’s smoking ban for those born after 2007 and New Zealand has already implemented a similar plan.
Despite this regulatory risk, the financials are nothing short of fantastic. Nicotine has always been a popular product and I see that continuing. I hold the stock and think it’s an excellent buy at the current price.
