Where can you look for reliable dividends after this year’s stock market crash? I’ve found three FTSE 100 shares with 7% dividend yields that look safe to me. I reckon all three are ideal picks for a Stocks and Share ISA, which will allow you to take the income tax-free.
Oil, gas and renewables
My first pick is oil and gas giant BP (LSE: BP). Oil producers have suffered this year from a massive price crash of their commodity combined with renewed pressure to cut carbon emissions. It’s been a difficult time and it always seemed likely to me that BP would have to cut its dividend.
In August, shareholders finally received the bad news. BP’s annual payout was cut by nearly 50%, from $0.40 per share to $0.21 per share, paid quarterly. It was a blow for shareholders, but I believe it’s a much more affordable payout that should enable the group to repay some of its debt.
The dividend cut is only part of a package of changes planned by new CEO Bernard Looney, who wants to cut the group’s carbon emissions and increase spending on renewables.
Achieving these changes looks challenging now, but the group is expected to return to profit next year, when the new dividend should be covered by earnings. At current levels, this FTSE 100 share still offers a 7% yield. My view is that BP is worth buying for income investors.
The cash is real
Tobacco stocks are probably even less popular than oil producers. But the reality is that FTSE 100 group British American Tobacco Group (LSE: BATS) is still very profitable. The group’s operating margin in 2019 was around 35%. So far this year, BATS is on track to deliver a slightly better result for 2020.
High profit margins and low spending requirements mean that British American generates a lot of free cash flow. Much of this surplus cash is returned to shareholders through the group’s dividend. As a result, this FTSE 100 share offers a dividend yield of around 7.5%.
My analysis of the business suggests that BATS’ dividend is affordable. I don’t see any obvious need for a cut. Indeed, I suspect that if the performance remains stable, its share price could rise over the next couple of years. There aren’t many alternatives for investors who want a reliable high yield income.
The FTSE 100 share you’ve never heard of
Life insurance firm Phoenix Group (LSE: PHNX) is often overlooked as a dividend stock. But this FTSE 100 share offers a 7% dividend yield and a strong track record of cash generation to support its payouts.
What’s different about Phoenix is that it doesn’t generally sell insurance to the public. Instead, it buys up so-called ‘closed books’ of life insurance policies from other insurers. These are then run to completion.
Skilled management and economies of scale mean that this business model generates plenty of cash. Last year, cash generation totalled £707m — more than 10% of the group’s £6.7bn market cap.
Forecasts for 2020 were for cash generation of £800m-£900m, but this figure is now higher thanks to the recent acquisition of rival ReAssure. This deal means that Phoenix is now the largest company of its type in the UK market.
I’ve been a following Phoenix for several years and haven’t yet been disappointed. I think the shares could be a great choice for high-yield income investors.