I’m wary of dividend shares that offer suspiciously high yields. There must surely be higher risks with them, right?
But sometimes I see very-high-yielding dividends that I think are worth the risk. It’s usually when stock markets are weak, and the economy is turning bad. Like now. Today, I’m checking out some dividend shares offering yields above 8%.
There are plenty in that range in both the FTSE 250 and the FTSE 100, so I’ve made my picks from diversified sectors:
| Company | Dividend Yield | Cover | Share price | 12-month change | P/E |
| Persimmon | 10.7% | 1.05x | 2,156p | -31% | 8.8 |
| Synthomer | 10.7% | 1.60x | 264p | -51% | 5.5 |
| Jupiter Fund Management | 10.4% | 1.58x | 159p | -42% | 5.9 |
| Direct Line Insurance | 9.1% | 1.05x | 251p | -16% | 10.4 |
| Centamin | 8.4% | 1.01x | 81.4p | -28% | 11.4 |
All of these have suffered big 12-month share price falls. But that’s often the direct cause of an elevated dividend yield. Investors sell out of a stock when they fear the company is not going to be able to meet its dividend forecasts.
Some of these are weakly covered too. So before I buy any high dividend shares, I dig deeper.
Excess capital
Persimmon’s big yield includes excess capital the housebuilder is returning as special dividends. The ordinary dividend would yield 5.8%, which is still an attractive payout. And it would be covered around 1.9 times by earnings.
The excess capital gives me confidence in the dividend this year. But there’s medium-term uncertainty over the property sector in the current economic climate.
Insurance firm Direct Line also has spare capital to return, and is currently engaged in a share buyback. Again, that boosts my confidence. But the insurance sector can also come under pressure during an economic downturn.
Biggest fallers
Fund managers like Jupiter can suffer during stock market downturns. Performance-related charges on its services are likely to be hit. And that in turn can lead to a dividend cut.
But I think the share price fall is overdone. And I reckon times like this are perfect for buying into this kind of business.
Synthomer is the biggest faller of these five, losing half its value in 12 months. That’s down to Covid-19, as sales of the company’s latex products soared, due to demand for protective gloves and clothing. Investors piled in, and now they’ve piled out again.
The dividend could well drop as earnings re-adjust to longer-term levels. But I still think I’m seeing a buy here.
Cyclical business
Miners offer some of the biggest dividend yields right now, and I’ve picked gold miner Centamin as an example. The risk is that the sector is cyclical, and dividends tend to climb and fall in line with worldwide commodities demand.
I see Centamin as perhaps the most attractive in the business though. The stock has already fallen back, which should lessen fears. And a few years of tough economics might do wonders for the gold price.
Overall, looking to start a dividend shares portfolio today, I’d be tempted to buy all five of these. And then just forget about them for five years.