One of the attractions of UK shares for me is the potential to generate new passive income streams. That’s especially true when I invest in high dividend yielders.
Here are two high dividend yielding FTSE 100 companies currently offering over 8% per year in payouts. I would consider buying both for my portfolio.
8.7% yield: Imperial Brands
The tobacco company Imperial Brands (LSE: IMB) is well-known for its dividends. Even after slashing the payout last year, these UK dividend shares still yield 8.7%.
How can the company manage that? In short, tobacco is a highly cash generative industry. To some extent, falling volumes can be mitigated by increasing prices. So the company is able to generate substantial free cash flows and use them to pay dividends. But some investors doubt how long this strategy can continue. Last year’s cut could be a taste of more to come if cash flows contract in future with declining volumes. Clearly there are risks here.
The company recognises the challenges of a shifting tobacco market. It has unveiled a new strategy this year focussed on growing market share in countries where it has large sales potential. That doesn’t change the long-term trends, but it could help to buy Imperial time to decide how else it can adjust for a changing demand landscape. Meanwhile, it started to raise its dividend again this year, albeit only by 1%. So, while dividends could fall, they might also actually grow in coming years.
9.2% yield: M&G
Among high dividend yielders, another name I would consider adding to my portfolio is investment manager M&G (LSE: MNG). Its 9.2% yield is among the highest of any FTSE 100 company.
The financial services provider benefits from a well-known brand and strong position in the UK market. While dividends are never guaranteed, its progressive dividend policy means that the management aims to increase the dividend over time.
But does the high yield suggest some investors worry about M&G’s prospects? After all, while the shares are up a fifth over the past year, since June they have drifted downwards. The company’s interim results showed it moving from a post-tax profit last year (using IFRS accounting standards) to a loss this time around. There was also a net client outflow in savings and assets management.
I think these factors are weighing on the M&G share price, as investors seek to assess whether the company is struggling to deliver growth, or simply experiencing a volatile period in its end markets. I think there is a risk that any sustained underperformance could threaten profits and therefore the dividend.
My next move on these 8%+ dividend yielders
I already hold Imperial Brands and would consider adding more to my portfolio. I do need to make sure to diversify my portfolio across different companies and business sectors.
As for M&G, I’ve been tempted by this share for a while. Its recent price fall has made it even more attractive to me. I recognise the risks involved but am still considering adding the 9.2% yielding shares to my portfolio.