The FTSE 100 is home to a number of dividend-paying shares. Some of which look particularly generous right now. But which stocks should I buy? And what should I consider before making the investment? Let’s explore.
Although the average FTSE 100 dividend yield is 3.6%, there are a couple of stocks that are currently offering around 11%.
I like to own dividend shares to earn some passive income, and an 11% yield looks mighty appealing right now. Especially considering the paltry interest rate I’d receive in my bank savings account.
With inflation expected to reach 8% this year, these dividends would more than keep up with rising prices.
11% dividend yield
The first FTSE 100 share that I’d buy is mining giant Rio Tinto (LSE:RIO). It’s the world’s second-largest metals and mining company. Founded in 1873, it has a rich history and is a well-established business.
Rio produces iron ore, which is used to make steel. In fact, that comprises around 75% of its business. Metal prices climbed significantly following a recovery in the global economy after many Covid restrictions were lifted.
Further supply constraints in China also kept commodity prices elevated. This resulted in record profits for the Anglo-Australian miner.
As a result, Rio raised its dividend by 86% compared with the prior year. The question is, are these dividends likely to be sustained going forward?
Looking ahead
It’s quite possible that the bumper profits are temporary. Looking ahead, the global economy is likely to be a lot weaker than it was coming out of the height of the pandemic. I wouldn’t be too surprised to see lower metal prices next year. As such, city analysts already see Rio’s dividend yield falling to 9% next year from 11% currently.
Despite the risk that its yield could fall, a 9% dividend yield would still make it the third-highest in the FTSE 100. It would also be a passive income that I’d be happy to accept. That’s why I’d buy the shares today.
Building passive income
The other FTSE 100 share paying an 11% dividend yield is UK-based housebuilder Persimmon (LSE:PSN). The company has consistently paid dividends for several years. But can it sustain such a large yield?
To answer that, I’d need to look at its prospects for the coming years. The long-term fundamentals in the UK housing market are strong. Demand for new housing continues to outstrip supply. And ample mortgage availability helps to support house prices.
That makes it an excellent environment for Persimmon to operate in.
Looking forward, the picture might not be as clear. Rising interest rates and falling consumer confidence could dampen demand for new housing, especially if the UK economy falls into recession.
Quality shares to buy
But Persimmon is a long-standing operator in this industry and it has survived several economic cycles. With good management, I’m confident it will continue to do so.
Lastly, I’d say this is a high-quality business with industry-leading profit margins. And its 24% tumble in share price over the past year now makes it an attractive proposition. I’d buy these shares today.