I’ve been looking for some stocks with attractive yield for my portfolio. Here are three FTSE 100 dividend shares with some of the highest yields in the index right now. I’ll explain my next move for each.
Tobacco shares
Tobacco companies often have high yields. Why is that?
First, making and selling products like cigarettes can be highly cash generative. They are cheap to produce but can sell at an attractive profit margin. As a mature industry, tobacco has limited options to reinvest profits. That means tobacco companies can use chunky cash flows to fund dividends.
Additionally, there is concern about the sustainability of the business model as cigarettes fall in popularity in many markets. That is a risk – and it helps explain the above average yield. Some investors fear the yields are ultimately unsustainable if smoking declines.
Two of the highest yielding FTSE 100 dividend shares are Imperial Brands and British American Tobacco. If choosing only one today I’d be tempted to invest in BAT for its scale, global reach, and history of raising dividends annually for over two decades. Past dividend payments aren’t a guide to future ones, though.
FTSE 100 dividend shares in the mining sector
A number of the highest yielding FTSE 100 dividend shares are miners. These include names like Rio Tinto, BHP, and Evraz.
For example, Rio Tinto currently yields over 5%. With its collection of quality mining assets, I think that there is a lot to like about the company. But with dividends as the objective, I would be wary of investing in mining companies for my portfolio. That’s because of the cyclical nature and high capital expenditure requirements of the mining industry. That leads to uneven dividend records in many cases.
With demand for metals expected to remain high as economies reopen, I think the outlook for companies like Rio are strong. But there is a risk that when demand falls back in future, commodity prices will slip and dividends will be cut. So, I won’t be buying Rio at this time.
Financial services pick
Another name on the list of highest yielding FTSE 100 dividend shares is M&G (MNG).
The investment management company currently yields 7.4%. While its dividend history as an independent listed company is limited, it raised its dividend this year. I took that as a sign of confidence from management.
M&G has over 5m retail customers and 800 institutional clients. So it benefits from wide recognition and a substantial customer base. I see that as positive for the investment case. I expect many customers will likely stick with the provider rather than take time to research alternatives. That should be good for revenue and profits.
One risk with a financial services firm like M&G is the impact of any broader economic downturn. That could lead to customers investing less, which could hurt profits.
My next steps on FTSE 100 dividend shares
I’d willingly buy more British American Tobacco shares for my portfolio today. I also continue to keep M&G on my watchlist and would consider buying it.
I won’t be investing in Rio Tinto or any mining shares, as I believe there are more attractive options among other leading FTSE 100 dividend shares.