Every investor loves a big fat juicy high-yielder, but they have also learned to be wary of them. The yield is calculated by dividing dividend by share price, so when the stock plunges,?? the yield can become dangerously bloated.
There are currently five FTSE 100 stocks with forecast yields of 8% or more, driven higher by market wobbles in February and March, according to research from AJ Bell. Overall, FTSE 100 stocks are now forecast to pay out a total of £87.5bn in dividends this year, at a yield of 4.4%. However, caution is required, because some of the highest forecast yields are starting to look somewhat toppy.
Of the top five, three are in the housebuilding sector, the remaining two are utilities. These two sectors have performed very differently lately.
Big and bouncy
Measured over five years, all three housebuilders have put in a storming share price performance. Persimmon is up 144%, Barratt Developments is up 89% and Taylor Wimpey 115%. The last 12 months have been choppier amid faltering house price growth, and Barrett and Taylor Wimpey are down slightly. However, Persimmon is still up 17%, which makes its 9.3% yield all the more impressive. Nor is it that expensive, trading at 13.4 times earnings.
Russ Mould, investment director at AJ Bell, says these high yields are partly due to the housebuilders' generous capital return programmes, but there is an underlying concern. "It may also hint at investor scepticism that the industry can maintain its current lofty levels of profitability without the benefit of Government assistance, via the Help-to-Buy and Lifetime ISA schemes."
With the exception of London, house prices continuing to grow faster than inflation. I anticipate a further slowdown, due to economic uncertainty, affordability issues and rising interest rates, but the market is firmly underpinned by supply shortages and pent-up demand.
My Foolish colleague Royston Wild reckons a high dividend and 7.5% growth in forward sales last year make Persimmon a brilliant buy. Forecast cover may look thin at 1.13% but with the group planning to pay 235p a share per year for the next three years, the dividend looks sound for now. With cover of 1.5% and 1.4% respectively, Barratt Developments and Taylor Wimpey also look solid.
British Gas owner Centrica has had a rotten run, its share price down 61% over five years, although there are signs of a recovery with a 9% jump over the last month. SSE trades 13% lower than five years ago, but is also up around 9% in the last month. Centrica offers a whopping 8.4% yield, and although cover is on the thin side at 1.19%, Roland Head reckons the dividend might just be safe, with the group maintaining its payout in 2017 while cutting net debt from £3.47bn to £2.60bn.
SSE recently raised its earnings per share guidance, offering hope to investors, and pledged to deliver on its dividend commitment. I cannot guarantee all five dividends are safe, but they do look more secure than I would normally expect. These are great times to be an income investor.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.