Here are five FTSE 100 shares offering dividend yields in excess of 8%, with reasons why I might buy… and why I might not.
First up is Rio Tinto (LSE: RIO), offering a yield of close to 18%. It fluctuates, because the share price has been erratic in recent months. The price climbed in the first half of the year, but it’s been falling back sharply since August. Over 12 months, Rio shares are up around 4%, compared to the Footsie’s rise above 20%.
Why would I buy? Well, the huge dividend yield pretty much says it all. I invest for dividends, and the bigger the better, so why wouldn’t I buy? Well, I fear Rio might soon start facing downwards pressure from the East.
China, today’s big consumer of metals and minerals, has seen its economic growth slowing. Property developer Evergrande is in trouble, and there are fears of contagion across the whole sector. That could, if it happens, cause demand for construction materials to fall.
The sector is cyclical over the long term too. On balance, though, that dividend yield makes Rio Tinto look tempting.
Steel maker Evraz (LSE: EVR) is on a double-digit yield too, around the 15% mark. On top of a 65% share price gain over 12 months, that’s a cracking total return.
Evraz saw profit from operations nearly double in the first half. And net operating cash flow spiked up 80% too. That suggests there should be plenty to hand over the shareholders this year, with an interim 7% yield already declared.
What’s the downside? Evraz focuses on one specific commodity, steel. It does everything from mining coal and iron ore to manufacturing the end product. In many ways that’s good, as it gives the company complete control over all of its inputs. But the singular focus on steel can compound the risks too.
Steel prices are perhaps in a bit of a bubble right now. And should demand fall (I’m looking at China again), I worry Evraz could crash right back. I’m on the fence on this one.
An unmissable pair?
I’m not on the fence over British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB), at least from a pure investing standpoint. We’re looking at yields of 8% to 9% here, and the dividends have been nicely progressive over the years.
I say progressive, but that was spoiled a little in 2020 by Imperial Brands. At the halfway stage that year, the company said it had “decided to rebase the dividend by one-third to accelerate debt repayment, while retaining a progressive dividend policy, growing annually from the rebased level.”
I don’t actually think that’s such a bad thing, and to me it suggests smart use of spare cash. Paying big dividends while shouldering hefty debts is effectively borrowing money to give to shareholders. And I don’t see that as an efficient use of cash. So with my long-term outlook, I prefer my companies to prioritise their balance sheets.
The reduction didn’t really harm the Imperial Brands share price. But then, it has been the poorer performer of the two over five years, with a 60% fall against British American’s 45% drop. Imperial has had a stronger 12 months, though, up 20% compared to no movement from its rival.
No dividend cut here
The 2020 dividend cut did point to a possible fear for British American Tobacco, though. Is that dividend likely to be cut? At the interim stage in 2021, the company reported adjusted net debt of £40.5bn. That seems a lot compared to Imperial’s £11bn at the equivalent point. But then, BATS has a market cap of around four times IMB’s, so proportionally things look about the same.
At the same time, British American did reiterate its dividend policy. The company spoke of its “commitment to 65% dividend pay-out ratio and growth in sterling terms.” On that basis, investors can presumably expect to keep tucking away an ever-rising annual payout.
I have been avoiding the elephant here, and that’s nasty, stinky, unhealthy tobacco. And the developed world’s increasing aversion to the noxious stuff. Judging by the persistently low valuations afforded to the BATS and IMB share prices, which keep the dividend yields so high, the market expects a crunch to come.
But I think there’s a good chance demand will hold up long enough, as the industry pursues alternative tobacco products. It’s only ethics that stops me buying.
The strongest miner?
I’m coming back to the mining industry for my final pick. It’s Anglo American (LSE: AAL), and its predicted dividend yield of around 9.5%. Anglo is a little different from the rest as, despite the name, it’s focused on South Africa. It owns diamond giant De Beers too, which adds a little extra interest.
Anglo has had problems in South Africa in the past, but they seem to be receding, and the company has put in an impressive performance in the last few years. The Anglo American share price is up around 40% over the past 12 months. And over five years, we’re looking at a gain of more than 150%.
Most of that has come since Anglo’s Covid pandemic recovery took root, and over that period it has outstripped its sector rivals. The company has been on a major share buyback programme for months, so the board appears to think its shares are good value.
I think so too. Yes, the outlook could turn bad just as it could with Rio Tinto. And yes, it’s possible we’re at a high point in the latest commodities cycle. But that dividend does look seriously tempting to me. Of these five stocks, and bearing in mind my personal investing approach, I think my pick would be Rio Tinto or Anglo American.
Yes, they both carry risk. But I’m adding the two to my potential buy list.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.