Dividends matter to many investors, including me, because they are an important source of passive income. The average dividend yield of the FTSE 100 index of shares is currently 3.0%. But quite a few shares pay out well above the average FTSE dividend yield. Here are three which offer at least double the average yield.
Evraz
Evraz (LSE: EVR) is a mining business with operations in a number of markets, notably Russia. It catches the eye of many income investors thanks to its dividend yield of 6.4%.
That’s certainly attractive to me. But I am wary of mining shares in general due to their volatility. They tend to be closely linked to the value of the metals concerned, which move up and down in cycles. Bringing new mines online is capital intensive and slow, so there is often a mismatch between supply and demand.
That can be great for share prices – Evraz has moved up 88% in the past year, for example. But it can also work in the other direction. It can also lead to very lumpy dividends. While a yield of 6.4% interests me, there is a clear risk that the dividend will fall if metal prices slump in future.
Above-average FTSE dividend yield in financial services
Another share that pays out far above the average FTSE dividend yield is financial services provider M&G (LSE: MNG).
The company provides investment management and administration services. That can be a low margin business, but with substantial revenues the company is able to make a handsome profit. Last year, for example, M&G recorded an after-tax profit of £1.1bn.
These profits help to fund a generous dividend, with the yield currently siting at 8.5%. That is one of the highest yields of any large British company.
I took a modest dividend increase this year as a sign of confidence from the management. Indeed, the company has stated that it intends to maintain or raise the dividend each year. That isn’t guaranteed, though, and there are risks with all shares, including M&G. For example, customer appetite for risk assets has partly been driven by low interest rates. Increasing UK interest rates could lead to investors reallocating money away from some asset types managed by M&G, hurting revenues.
Smoking hot passive income
Another name high on the FTSE dividend yield leaderboard is tobacco company Imperial Brands (LSE: IMB).
There’s a clear risk that declining cigarette consumption will hurt tobacco companies’ revenues and profits. Imperial plans to tackle this by focussing on boosting market share in five key territories. It also hopes that it can use price increases to mitigate falling volumes.
Whether that strategy will succeed, only time will tell. The yield of 8.8% looks attractive to me, but it could be hard to sustain if profits decline. Imperial slashed its dividend last year. It has also sold assets such as its premium cigars business. That has helped its balance sheet, but it’s harder to maintain a dividend from a smaller pool of profit making assets. I am happy holding Imperial for its juicy yield, but fully aware of the risks involved.