Today I’m looking at five blue-chip FTSE 100 stocks which support dividend yields of 5% or more.
First up is utility provider SSE. Shares in this company currently support a dividend yield of 8.8%. Unfortunately, analysts expect the company to reduce its payout by 17% in 2020, but even after this reduction, it should yield of 7.3%. What’s more, by reducing the payout, the payout cover will increase to 1.3x, which in my opinion makes the distribution more sustainable at the lower level.
Next is SSE’s peer Centrica. Over the past few months, shares in Centrica have been under pressure due to concerns about the impact the upcoming price cap will have on the company’s earnings. While it is too early to say how much of an impact the cap will have, the numbers suggest to me that the current sell-off has been overdone.
At present, the stock is trading at a forward P/E of 11 and support a dividend yield of 8.4%. The distribution is covered 1.1x by earnings per share so it does not look as it management will have to reduce the dividend anytime soon.
Up next is tobacco group Imperial Brands. At the time of writing, shares in this company are trading at a forward P/E of just 9.2 and support a dividend yield of 8%. As the payout is covered 1.4x by earnings per share, this distribution looks to me to be sustainable for the foreseeable future.
In addition, management it is targeting 10% per annum dividend growth for the next few years, implying that the yield could hit 10% on the current share price within five years. At this point in time, I see no reason why the business cannot make good on this promise. If it does, investors should be well rewarded over the next few years with both income and capital growth.
Next up, we have insurance and long-term savings business Aviva. What I really like about this company is that, at the time of writing, the stock’s dividend yield is greater than its P/E. The stock yields 7.3% and trades at a 2019 P/E of 7. Bargains like this don’t come around that often.
It is difficult to see why the market has placed such a low valuation on the stock. With analysts expecting earnings growth of 58% in 2018 and 5% in 2019, it certainly doesn’t appear that investors are worried about the group’s growth potential.
The final company I’m going to profile in this article is Direct Line Insurance. Direct Line rewards its investors through a combination of regular and special dividends. Analysts believe the total dividend yield this year could total 8.7% and hit 8.9% in 2019. On top of this, the stock is trading at a relatively undemanding forward P/E of 10.5.
As one of the UK’s largest insurance companies, I think this multiple undervalues the business and its prospects. Even as an income play, I think the stock is worth significantly more than its current value.
Disclosure: The author owns shares in Imperial Brands.