Earning an average 11% dividend yield on my share portfolio would be attractive at any time. With inflation surging, however, it is even more appealing to me right now than it might normally be. To target that average yield, I would invest equally in two very different income shares.
Legal & General
The first of the two is Legal & General (LSE: LGEN). The financial services giant is a household name with an iconic logo recognised by millions of people.
That is part of its appeal to me. Such wide brand recognition is an important asset as far as I am concerned. It helps Legal & General attract and retain clients without needing to spend the same sorts of money a new market entrant might need to splash out.
On top of that, the installed customer base is also an advantage. At least a portion of customers keep using the same financial services provider from year to year without shopping around for a better deal. That can be good for profits at a company like Legal & General, although one risk to that model is new renewal policy pricing rules that were introduced this year.
But with its strong brand, deep experience, installed customer base, and exposure to an area with buoyant demand, I think Legal & General is well-positioned both for now and the future. I would happily add this FTSE 100 member to my portfolio for the 7.2% dividend yield it offers.
Persimmon
The second share I would consider buying for my high-yield portfolio is very different. While Legal and General already has what I see as an attractive yield, it is still less than half that of housebuilder Persimmon (LSE: PSN)! The FSTE 100 member has a mouth-watering payout equivalent to 15.3% of its current share price.
When a FTSE 100 share has a yield that high, the first question that springs to mind is whether it is a value trap. A value trap is a company that has a juicy looking dividend yield partly because investors expect the dividend to be cut and have pushed the share price down. If the dividend is cut in future, the share price could fall further too. What looks like a bargain could turn out to be something very different.
The Persimmon share price has fallen 46% in the past year, so clearly many investors are nervous about the effect a worsening economy could have on the company’s revenues and profits. However, I think there is a lot to like about the company’s business model. It consistently reports high profit margins, including in the first half of this year. It has decades of experience, including in recessions and amid weak housing markets. Housing demand remains strong.
Although the dividend is barely covered, that reflects Persimmon’s strategy of paying out surplus cash to shareholders. I see that as positive. Maybe profits will fall and the company could cut its dividend. However, it is currently big enough that it could be halved — and still look attractive to me!
Two income shares yielding an average 11%
By putting money into these two income shares equally, I could hopefully start earning an average dividend yield of 11%.
There are clearly risks. But by diversifying across two different industries I would help to reduce my exposure to any one business sector.