The FTSE 100 currently contains an unusual number of big companies offering very high dividend yields.
In my view, some of these stocks provide outstanding buying opportunities at current prices. In this article, I’ll take a closer look at three contenders, all offering forecast yields of about 6%.
Legal & General
Insurance and pension giant Legal & General Group (LSE: LGEN) will never be a fast grower, but it’s very good at what it does.
The firm hasn’t suffered as much as expected from changes to pension rules. One reason for this is a move into bulk annuities, where the firm takes responsibility for meeting the liabilities of large corporate pension funds.
Legal & General’s profits have risen steadily since bottoming-out in 2011. Post-tax profits were 35% higher last year than in 2011. Earnings per share are expected to have risen by 14% in 2015, putting the shares on an undemanding forecast P/E of 12.
For income investors, the potential rewards are high. The full-year dividend for 2015 is expected to be 13.4p per share, giving a potential yield of 5.7%. A further 6% increase is expected in 2016.
In my view Legal & General could be an outstanding buy, for investors wanting a long-term income.
Barratt Developments
Big housebuilders such as Barratt Developments (LSE: BDEV) have fallen steadily since last September, despite delivering record results and generous dividends.
The message from the market is clear: investors believe that the housing boom may be nearing its peak. This is why it makes good sense for Barratt to be trading on a 2017 forecast P/E of just 9. If profits are close to their peak, a significant decline could follow.
A downturn is inevitable at some point, although it could be several years yet. In the meantime, Barratt is returning cash to shareholders at a generous rate. In its recent interim results, Barratt announced an interim dividend of 6p per share and said it planned to return a total of 67.8p per share to shareholders by November 2017.
Analysts expect a payout of 30.2p for 2016, giving a forecast yield of 5.6%. It may be worth continuing to hold, although I wouldn’t be a buyer.
GlaxoSmithKline
The UK’s largest pharmaceutical firm offers a 2016 forecast dividend yield of 5.8%. However, major GlaxoSmithKline (LSE: GSK) shareholder Neil Woodford recently told Investors Chronicle that he thought Glaxo’s dividend was too high and might need to be cut.
It’s easy to see why. Debt levels remain high and Glaxo’s forecast 2016 dividend of 82p is barely covered by forecast earnings of 85p. A more prudent level of earnings cover might be 1.5, which would imply a dividend cut to 57p.
Despite this risk, Mr Woodford remains a shareholder as he believes there’s hidden value in GlaxoSmithKline’s business. I agree with this view and am happy to continue holding my Glaxo shares, as I believe that the market will eventually find a way to realise this value.
In the meantime, I’ll continue to collect my dividend payments and chance the risk of a cut. Glaxo remains a buy, in my opinion.