When big players in the FTSE 100 build up cash piles, what to do with them? They have four options:
- Reinvest into the business for future growth.
- Buy back shares to reduce their shareholder base.
- Buy other businesses or assets.
- Pay shareholders regular cash dividends.
High-growth businesses almost always choose options 1, 2 or 3. One cynical reason they choose option 2 is to boost earnings per share and inflate the value of executives’ share options.
However, when I buy shares to own a company, I demand, “Show me the money!” (just like Cuba Gooding Jr in 1996 film Jerry Maguire). Indeed, I look for regular, rising and well-covered cash dividends as a show of company strength.
‘Boring’ FTSE 100 firms can pay big dividends
Recently, my search for high-yielding shares alighted on UK telecoms giant Vodafone. In its latest financial year, Vodafone forked out £2.05 billion in cash dividends to shareholders – one of the FTSE 100’s biggest dividend distributions.
It’s easy to see a future for Vodafone, moving in the fast-growing, vital world of technology. But what about investing in ‘boring, old-fashioned and dying’ industries? From a dividend standpoint, I’d highly recommend it!
From telecoms to tobacco
Today, my search for yield in the FTSE 100 focuses on two pariahs of the investing world, both tobacco companies. While ethical investors shun tobacco stocks, as a smoker on and off since the late Eighties, I know just how addictive their products are.
Thanks to their defensive qualities, the coronavirus market crash has propelled shares in British American Tobacco and Imperial Brands into the highest ranks of the FTSE 100.
On 1 April, I recommended investors buy shares in Imperial Brands. Its share price has since crept up by 6% to 1,635p. But buying at today’s higher price still means banking an incredibly high yearly dividend of around 13%. And remember that’s a yearly payout in good, old-fashioned cash. Even it were to halve to 6.5% a year, it would still beat most income-generating assets hands down.
As for BAT, its business is broadly the same: selling tobacco and cancer sticks to a shrinking global customer base. And yet, at its current share price of 3,044p, BAT is a £70 billion mega-cap business, soaring to fifth in the FTSE 100 index. Meanwhile, as billions of smokers quit or die off, BAT pays a chunky and steady 6.7% dividend yield to its owners.
In summary, in times of crisis, investors should worry more about the return of their capital than the return on it. Investing in Imperial Brands and BAT won’t shoot the lights outs, but their historically high dividends are ideal for FTSE 100 fans, both individual and institutional investors alike.