3 dirt-cheap FTSE 100 dividends stocks with 9% yields I’ve bought for 2019

Various denominations of notes in a pile
Various denominations of notes in a pile

When stocks markets are falling and you shares are dropping, it can pay to follow US billionaire Warren Buffett’s advice to “be greedy when others are fearful”. By buying during market corrections, you can sometimes pick up terrific bargains.

Today, I want to look at three FTSE 100 stocks from my own portfolio. Each of them has a forecast dividend yield for 2018 of about 9%. These are reputable businesses with long trading histories. You would not normally expect them to offer such a high dividend yield.

The situation isn’t without risk, but I think these stocks are offering investors the chance to lock in unusually high dividend yields and future capital gains.

Unpopular but performing well

Insurance group Aviva (LSE: AV) has been unable to win back market confidence over the last few years. The shares have fallen by about 25% in 2018, despite the group delivering a steady turnaround in the hands of recently-departed CEO Mark Wilson.

Aviva’s adjusted operating profit rose from £2,688m to £3,068m between 2015 and 2017. Annual cash remittances, which are used to fund dividends, rose from £1,507m in 2015 to £2,398m in 2017.

The dividend has risen from 15p in 2013 to 27.4p per share in 2017. This year’s forecast payout of 30.2p per share should be covered 1.9 times by earnings of 57p. That seems a decent margin of safety to me.

Broker forecasts put the stock on a 2018 price/earnings ratio of 6.5, with a dividend yield of 8.2%. This yield is expected to rise to 9.1% in 2019. I think Aviva looks too cheap and would rate the shares as a buy.

Direct growth

Direct Line Insurance Group (LSE: DLG) built its reputation by selling directly to customers, rather than through middlemen and comparison sites. The company has stayed true to this approach and this year has seen continued expansion of its own-brand customer base.

Sales have been dented this year by the loss of major partnerships with Nationwide and Sainsbury’s. A rise in weather-related claims after last winter’s cold spell also dented pre-tax profit, which fell by 13.9% to £293.8m during the first half of the year.

However, profitability remains strong, with a return on tangible equity of 21.8%. Broker forecasts have also been stable and put the stock trading on 10 times 2018 forecast earnings, with a dividend yield of 8.9%. I’m hoping to buy more.

A 9% yield from tobacco

It seems pretty certain that long-term smoking rates will continue to decline. This could eventually become a problem for big tobacco firms such as Imperial Brands (LSE: IMB).

But it’s worth keeping this risk in context. Imperial sold 255.5bn cigarettes last year. Although this was 3.6% down on the previous year, by focusing its efforts on fewer, bigger brands, it was able to lift operating profit by 5.7% to £2,407m.

The key attraction for investors here is the group’s free cash flow which, for various reasons, is normally greater than its accounting profits. This is all above board and means that Imperial can support very generous dividends.

Chief executive Alison Cooper has pledged to maintain her record of increasing payouts by 10% each year. Analysts expect a dividend of 205.3p per share for 2018/19, giving a forecast yield of 8.9%. At this level, I believe the shares are a buy.

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Roland Head owns shares of Aviva, Direct Line Insurance, and Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.