As interest rates rise around the world, dividend stocks are paying out fatter yields as the prices of shares decline.
I think selecting dividend stocks from the FTSE 100 is a good idea as dollar-denominated stocks are costly right now. Of course, if the pound never recovers against the greenback, I might regret having focused on the UK stock market.
But I’ve found the two stocks on the FTSE 100 with the highest forward dividend yields. How confident am I that these juicy payouts are sustainable?
Safe as houses?
Persimmon (LSE:PSN), a housebuilder headquartered in York, pays the highest forward dividend yield on the FTSE 100 at 19.3%. In its half-year results for 2022, the company boasted of “strong demand” in the sector, with 6,652 new homes completed in the six months to 30 June.
But is the company a reliable dividend payer?
Leafing through Persimmon’s historical dividend payouts, I find that from 2016 to 2022 the dividend has been consistent and growing, from 110p to 235p.
It was a similar pattern from 2001 to 2007 when the Persimmon dividend grew every year, from 12.8p to 51.2p.
On the other hand, 2009 to 2015 was a bleak dividend winter for shareholders, with an average payout of 1.2p a year and four years when the figure was zero.
Housing is a boom-and-bust sector, and I fully expect Persimmon to cut its dividend when the next crash comes. With mortgage borrowing costs rising and inflation cutting into people’s disposable income, I don’t think the next housing bust is far away. I’ll be avoiding Persimmon shares.
Sitting on a copper mine
Rio Tinto (LSE:RIO), a multinational mining company, pays the second-highest dividend yield on the FTSE 100 at 12.3%. From aluminium to iron ore, copper, uranium, and diamonds, Rio Tinto’s £60bn revenue in 2021 is well diversified across a broad basket of commodities.
Unfortunately, Rio Tinto’s low price-to-earnings (P/E) ratio of five isn’t the screaming buy signal I might assume it to be. Companies in cyclical sectors (like mining) tend to show their lowest P/E ratios just at the top of the cycle. That’s because earnings swell as the price of the commodities they sell skyrocket.
It’s true that high interest rates and Covid lockdowns in China have already conspired to drag down commodity prices in 2022. However, I suspect they might have further to fall if major economies dip further into recession in 2023 and 2024 than currently expected.
Still, Rio Tinto’s dividend history doesn’t tell the same famine-and-feast story as that seen with Persimmon.
It’s true there have been occasional years since the turn of the millennium when the dividend rose and fell precipitously. However, taking a three-year moving average of Rio Tinto’s dividend payments from 2000 to 2020 shows a fairly smooth line of consistent growth.
I plan to add Rio Tinto to my portfolio, because I’m bullish on what the ‘green revolution’ and population growth mean for commodity demand long term. In addition, the dividend payment is well covered by earnings.