One huge problem for UK savers right now is that the rate of inflation is at a 40-year high. The Consumer Prices Index (CPI) soared by 9.4% in the 12 months to June 2022. This means that a basket of goods bought a year ago is now nearly a tenth more expensive. Yikes. It also means that the buying power or value of my cash savings is being rapidly eroded by steeper prices. To try to offset the corrosive effect of red-hot inflation, my wife and I recently put a chunk of spare cash into UK shares.
Finding income from the FTSE 100
With inflation expected to reach double digits within months, I went looking in June and July for shares in quality UK companies that pay market-beating dividend income. Dividends are regular cash payments paid to shareholders by companies. However, these payouts are not guaranteed and can be cut or cancelled at any time (as happened during 2020’s Covid-19 crisis). Also, not all London-listed shares pay out dividends — in fact, the vast majority don’t.
Hence, to find high-income shares, I looked specifically in the blue-chip FTSE 100 index. Almost all ‘Footsie’ shares pay dividends to shareholders, with a few growth shares being the exceptions. For London’s leading stock-market index, the dividend yield is around 4% a year. So our goal was to buy shares that pay out a multiple of this cash yield to patient shareholders.
Five UK shares we bought for high dividend income
Here are five UK shares my wife recently bought for their market-beating dividend yields:
| Company | Business | Share price | 12-month change | Market value | Dividend yield | Dividend cover |
| Persimmon | Housebuilder | 1,875p | -35.3% | £6.0bn | 12.7% | 1.0 |
| Rio Tinto | Miner | 4,844p | -14.1% | £82.7bn | 11.0% | 1.6 |
| Direct Line | Insurer | 215.4p | -30.3% | £2.9bn | 10.9% | 0.8 |
| Legal & General | Insurer | 282.7p | 3.7% | £16.8bn | 6.7% | 1.8 |
| Aviva | Insurer | 467.9p | -15.5% | £13.0bn | 6.4% | 1.6 |
Four of these five UK shares have fallen in value over the past 12 months, with the exception of Legal & General Group. As a veteran value investor, I’m often drawn to decent companies whose share prices have taken a knock, but that I believe have recovery potential.
Delicious dividends
As I said, our main reason for buying into these companies was to collect their generous dividends. Cash yields at these five firms range from nearly 7% to almost 13%. Across all five stocks, the average dividend yield comes to 9.5% a year — coincidentally, almost exactly in line with current UK inflation.
However, not all of these dividends are covered by company earnings. For example, Direct Line’s earnings only cover four-fifths of its dividend payout. Then again, the insurer has confirmed that its strong balance sheet will allow it to keep paying high dividends for the time being. Likewise, the double-digit cash yields on offer at Persimmon and Rio Tinto could well be under threat in an economic slowdown.
This is not a proper portfolio
It’s important to note that five stocks does not a proper portfolio make. With three insurers’ shares, this mini-portfolio is highly concentrated and, therefore, risky. But I’m happy to take reasonable risks by buying cheap shares in good businesses. And that’s despite worrying about interest rates, recession and the Ukraine war!