These 2 FTSE 100 dividend stocks yield 9%, but is this mighty income sustainable?

Road sign warning of a risk ahead
Road sign warning of a risk ahead

Question: what kind of world are we living in when top FTSE 100 companies are paying an income of more than 9% a year, simply for holding their stock? Answer: a crazy world where the average savings account gives you 0.5%.

This mismatch is incredible. Yet most people still simply leave their money in cash. Yes, stocks are riskier in the short term, but in the longer run, they should be far more rewarding.

Phoning in

The first of these 9% yielders is Vodafone Group(LSE: VOD). No fly-by-night operation this, but a global telecommunications FTSE 100 giant with a market capitalisation of £40bn, and a proud dividend history.

However, Vodafone has consistently failed to deliver share price growth, and that hasn’t changed. After peaking at 250p in the summer of 2015, it has since plunged to 146p. There may now be a buying opportunity here as it now trades at just 11 times earnings, against the 15 times normally seen as fair value.

Wild times

As Roland Head points out, the company’s earnings tend to fluctuate wildly due to spectrum auction payments and capital spending obligations. Investors usually don’t pay much heed as long as they feel the dividend is safe, but now they are beginning to fret.

The forecast yield is currently 9.4%, with cover of just 0.7. That means it’s not covered by earnings, so management will have to borrow money, or cut the yield to plug the gap. Borrowing is only a short-term fix, so you can guess where this is heading.

The other option is to dramatically boost revenues. But earnings per share (EPS) are forecast to fall 12% in the year to 31 March 2019 and, although they may rise 14% the year after, this may not be enough. By then, EPS will stand at 10.4p against a dividend per share forecast of 13.9p. Something has to give. Mind you, management could halve the payout, and it would still yield more than 4.5%.

New Standard

Standard Life Aberdeen(LSE: SLA) currently yields 9.1%, with a more comforting cover of 1.4, which suggests the payout is safer than Vodafone’s. However, this high yield is once again the sign of a company in trouble.

The dividend is quite a weight to carry, and it won’t get lighter either. EPS are forecast to fall 36% this year, then rise 9% in 2019. At that point, the dividend will stand at 23.42p a share, against EPS of 23.99p, the thinnest of positive margins.

Life lessons

Standard Life’s merger with Aberdeen boosted synergies by 25%, but hopes that it would also deliver economies of scale floundered when Lloyds subsequently dumped its £109bn mandate, citing competition concerns, withdrawing almost 18% of assets under management. Oops.

The group is currently operating a £750m share buyback programme, with all shares purchased to be cancelled. That will drive up EPS, and reduce the amount of dividends it must pay out. Hopefully, that will preserve the payout.

Standard Life Aberdeen’s stock has plunged more than a third, from 431p to 264p over the last 12 months, with recent stock market volatility playing its part. It’s a buying opportunity. One made for crazy times like these.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Standard Life Aberdeen. 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.