Investing in high dividend stocks is not without risk. Big yields can indicate the market has doubts about the sustainability of the payout. The three FTSE 100 shares I’m looking at today have yields of up to 8%. They’re on my ‘buy’ list, because I think the fact their earnings come from relatively predictable industries helps underpin their big dividends.
High dividend stock #1
National Grid (LSE: NG) has a unique position at the heart of the UK’s energy system. It owns the high-voltage electricity transmission network in England and Wales. It also owns and operates the high-pressure gas transmission system in Great Britain. In addition, it’s one of the biggest investor-owned energy companies in the US. It serves more than 20m customers throughout New York, Massachusetts, and Rhode Island.
The company’s current dividend policy aims to “increase dividend per share by at least RPI for the foreseeable future”. Such an increase implies a dividend close to 50p for its financial year ending 31 March. This represents a yield of 5.7% at its current share price of 876p.
As a regulated business, National Grid operates under a regime that aims to strike a happy medium between a fair price for consumers and a fair balance of risk and return for shareholders. Nevertheless, there’s always the risk regulators could impose price controls that lead to less generous dividends than are currently being paid.
High dividend stock #2
GlaxoSmithKline (LSE: GSK) is a global business. As such, it has good geographical diversification. It’s also diversified across pharmaceutical, vaccine and consumer healthcare products. Nevertheless, it’s still exposed to a risk specific to drug companies. Namely, potential harm to patients. GSK has been obliged to settle a number of personal injury lawsuits in its history. However, due to its size and financial strength, these haven’t derailed the business or shareholders’ dividends.
In its third-quarter results, issued in October, the company said it “currently intends to maintain the dividend for 2020 at the current level of 80p per share, subject to any material change in the external environment or performance expectations.”
The company also said it intends to increase free cash flow cover of the dividend before returning it to growth. City analysts expect growth to resume in 2023. Meanwhile, the 80p payout gives a yield of 5.8% at the current share price of 1,380p.
A FTSE 100 share with an 8% yield
In the world of high dividend stocks, only a few offer yields of 8%+. British American Tobacco (LSE: BATS) is one. Like GlaxoSmithKline, it’s a global giant. With addictive products, its earnings are relatively reliable, whatever’s happening in the economy.
World consumption of traditional tobacco products is in a slow structural decline. This is due to increasing regulation and education. However, while volumes are shrinking, the company’s revenues are expanding. This is because growth of its new-category products — heated tobacco, vapour and modern oral — is more than offsetting the decline in its traditional combustible products.
Based on City earnings forecasts, and the company’s 65% dividend payout ratio, I think we can expect a dividend of around 210p when the company releases its 2020 results on 17 February. This gives a yield of 7.7% at a current share price of 2,739p. This rises to 8% for 2021 on forecasts of a dividend increase to around 220p a share.