Three FTSE 100 stocks with dividend yields over 6%

Shell dividend unilever dividend

The FTSE 100 index is home to many high yielding dividend stocks. Today, I’m looking at three stocks that currently have dividend yields in excess of 6%.

Royal Dutch Shell

Royal Dutch Shell (LON:RDSB) (RDSB.L) has legendary status among the dividend community, having not cut its dividend since World War 2 despite significant oil price volatility in that time.

Shell reports its earnings and declares its dividends in US dollars, meaning that the payout to UK investors has been enhanced with sterling falling heavily since the Brexit vote. The oil giant declared a dividend payout of $1.88 last year, equating to a yield of a huge 7.1% at the current share price.

While that sounds like a fantastic yield, caution is warranted with Shell’s dividend in my view, as there’s no guarantee that investors will continue to receive a payout of that magnitude going forward.

With the oil price having fallen considerably in recent years, Shell’s profits have deteriorated significantly. For example, the company reported a net profit of just $4.6 billion last year, compared to $30.8 billion in FY2011. Earnings per share of 58 cents last year gave a dividend coverage ratio of just 0.31, a level that is clearly unsustainable.

While Shell has said that it is committed to the dividend, the company urgently needs oil prices to rise in order to boost profitability and ensure that it can continue to pay the same level of dividend going forward.

BP

Oil major BP (LON:BP) (BP.L) is in a similar position to Shell.

Like Shell, BP pays its dividends in US dollars and for the last three years has paid out dividends of 40 cents per share. At the current share price of 443p, that equates to a high yield of 7.0%.

However, dividend coverage was 0.02 last year, and the dividend has not looked sustainable since the company generated earnings of $1.24 in FY2013.

In terms of the company’s dividend policy, BP states on its website:

The board decide the level of the dividend with each quarter’s results. The amount and timing of a dividend may be changed at any time without notice.

So this is another high yield to be cautious of in my opinion, because unless the oil price picks up soon, a dividend cut may be on the horizon.

SSE

Lastly, also offering a huge dividend yield at present is utility giant SSE (LON:SSE) (SSE.L).

SSE paid out dividends of 91.3p last year, equating to a yield of a generous 6.2% at the current share price. The dividend was covered by earnings 1.4 times.

SSE places a strong emphasis on rewarding shareholders through dividends, and states on its website:

We believe that our first responsibility to shareholders is to give them a return on their investment through the payment of dividends. We aim to do this by successfully fulfilling our core purpose, which is to provide the energy people need in a reliable and sustainable way.

The company has increased its dividend every year since 1999 and aims to increase the payout by at least Retail Price Index (RPI) inflation. City analysts forecast dividend growth of 3.1% and 2.6% for this year and next year.

For those looking for dividend income, SSE might be the safest pick of the lot.

Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

More from Edward Sheldon, CFA

Three top dividend ideas for August

While the FTSE 100 is still at a high level of 7400...
Read More

Leave a Reply

Your email address will not be published. Required fields are marked *