The UK stock market has a reputation for being a good source of dividend income. Most of these high-yielders are in the FTSE 100. Today, I want to look at five lead index shares with high yields of 7% or more that I think could perform well in 2022.
I’d be happy to buy all of these shares for my portfolio, as my analysis suggests the dividends they offer should be sustainable. But it’s important to remember that dividends are never guaranteed. Even healthy companies can sometimes cut, or suspend, their payouts, as we saw last year.
I reckon this 9% yield is too cheap
My first pick is FTSE 100 tobacco group Imperial Brands (LSE: IMB). When CEO Stefan Bomhard took charge last summer, he made the decision to focus on the group’s core brands, such as JPS, West and Gauloises. Spending on next-generation products such as vapes has been cut.
These changes seem to be working. Imperial’s operating profit rose by 15% to £3.1bn last year, while net debt fell from £11.1bn to £9.4bn.
I don’t expect much long-term growth from my Imperial shares. I’m also aware the continued decline in smoking rates and the risk of tougher regulations could hit sales in the future. However, I think these risks are already priced into the stock.
Imperial Brands currently trades on just six times forecast earnings, with a 9.1% dividend yield. As a pure income play, this stock remains a buy for me.
My top housebuilder
Next on my list is housebuilder Persimmon (LSE: PSN). Although the stamp duty holiday has now ended, this business is still seeing strong demand for new homes.
CEO Dean Finch recently said that the number of sales reservations per new home site is currently 16% ahead of 2019. Finch expects the number of homes completed this year to be 10% higher than in 2020.
Persimmon already has £1.15bn of forward sales reserved from 2022 onwards, suggesting that next year’s results should be fairly stable.
Profit margins remain high at this business, despite rising labour and material costs. There’s no debt and Persimmon reported a cash balance of £895m at the end of October. I think this should provide good support for this year’s expected dividend of 235p per share, giving a forecast yield of 8.4%.
The only big risk I can see here is that market conditions will slow drastically, leading to a fall in house prices and lower sales. Rising interest rates seem the most likely trigger for this, in my view. But, so far, there’s not much sign of this. I remain happy to hold Persimmon.
A little-known FTSE 100 7%-er
You may not be familiar with FTSE 100 insurer Phoenix Group (LSE: PHNX). Until recently, this retirement group specialised in buying existing insurance policies from other insurers. However, Phoenix is now expanding into new business areas, selling products under the well-known Standard Life brand.
The company’s half-year results showed £412m of new business, compared to £358m last year. So there’s some growth, but it’s still early days.
I think the main risk here is that Phoenix won’t be able to generate enough new business to replace the income from older run-off policies.
However, the company’s track record over the last few years has been good. Phoenix has met management targets and generated plenty of surplus cash. For now, the stock’s 7.5% dividend yield still looks safe to me.
A miner offering 10%
Shares in FTSE 100 mining group Rio Tinto (LSE: RIO) hit a record high earlier this year when the price of iron ore soared to more than $200 per tonne. Things have calmed down a bit, and Rio’s share price has fallen 30% from its April peak.
I think this heavyweight miner is starting to look better value. Low costs mean that profits are expected to stay strong next year, even as commodity prices cool. Broker forecasts at the moment suggest shareholders could receive a 10% dividend yield in 2022.
For me, the main risk is that the shares are still too expensive to ride out a serious mining downturn. However, we might not see that scenario again for several more years. In the meantime, I expect Rio to remain highly profitable. On balance, I think Rio shares look reasonably-priced for income.
Unpopular but too cheap?
My final pick is telecoms giant Vodafone Group (LSE: VOD). It’s best-known in the UK as a mobile phone operator. But in Europe, Vodafone is also a big broadband provider, while in Africa, it operates one of the biggest mobile money services.
Vodafone boss Nick Read has streamlined the business. He’s now focused on more profitable growth opportunities, such as digital services.
It’s a tough balance to strike, because spending requirements are already high as the 5G rollout continues. Read has to juggle debt repayments, dividends, and new investment. If he gets the balance wrong, he might have to cut the dividend.
No investment is ever completely safe, but I’ve followed Read’s progress since he took charge and, so far, I’ve been impressed. For this reason, I’d still be happy to buy Vodafone stock — which offers a 7% dividend yield — for my portfolio.
An easy route to passive income?
I’d be happy to buy all of these FTSE 100 dividend stocks for 2022. But as I mentioned at the top of this piece, dividends are never guaranteed.
For this reason, I would never rely on just five dividend shares to provide a passive income. A single cut could have a big impact on my overall portfolio income. What I do instead is to run a dividend portfolio with 20 stocks. That way, any single cut should only have a small impact on the total income from my portfolio.