When it comes to high dividend stocks, you have to be a little bit careful. A very high yield can signal a dividend cut ahead. Often, what’s happened is that the ‘smart money’ has already dumped the stock, pushing its price down. This has resulted in a temporarily high yield.
It is possible to find genuine high yielders that can sustain their big payouts, however. The key, in my view, is to look for companies that are growing. With that in mind, here’s a look at two UK high dividend stocks I’d buy now.
A high dividend stock with an 8% yield
One of the first UK stocks I’d turn to for high yield is Legal & General (LSE: LGEN). It paid out dividends of 17.6p per share last year, which at the current share price, equates to a fantastic trailing yield of about 8%. Unlike many other FTSE 100 stocks, the company did not suspend or cancel its dividend due to Covid-19 uncertainty.
The reason I like Legal & General as a high dividend stock is that it has plenty of growth potential. Most high-yield stocks can be found in low-growth industries that face structural challenges. Legal & General, however, operates in industries that look set for robust growth in the years ahead.
On the retirement side of the business – where the company helps organisations ‘de-risk’ their pensions – there’s a potential £1trn+ of defined-benefit pension liabilities looking to approach the market in the future. Meanwhile, on the investment management side, the company looks well placed to grow as Britons save and invest more for the future. Future growth should support the dividend.
It’s worth pointing out that analysts at Bank of America recently commented on the appeal of LGEN’s high dividend. “We think this is a particularly appealing proposition in a market starved of yield. Further, we think that the regulatory risk to the dividend is low”, they wrote in a note to clients.
All things considered, I think Legal & General is a top high-yield dividend stock. With the stock trading on a rock-bottom forward-looking price-to-earnings ratio of about 8, I’d snap it up today.
FTSE 100 dividend champ
Another UK high dividend stock I’d buy now is GlaxoSmithKline (LSE: GSK). It’s a leading healthcare company that operates three business segments: pharmaceuticals, vaccines, and consumer healthcare. For the last few years, it has paid out 80p per share in dividends. At GSK’s current share price, that’s a yield of a very healthy 5.3%. Glaxo also did not cancel or suspend its dividend earlier in the year.
Like Legal & General, GSK operates in a growth industry. The healthcare industry is set to grow substantially in the years and decades ahead, driven by powerful trends such as the world’s ageing population and rising wealth in developing countries. This should power GSK’s revenues higher and support the company’s ability to pay its big dividend.
GSK shares have underperformed recently on the back of the group’s second-quarter results, in which vaccine revenues were down 29% due to Covid-19 disruption. I think this share price weakness has created a great buying opportunity for income seekers. With the stock now trading on a forward-looking P/E ratio of about 13 and offering a high dividend yield of 5%+, I see it as a ‘buy.’