Today, I thought I’d take a look at the highest yielding dividend stocks in the FTSE 100 right now, so I screened the FTSE 100 for the three highest yielding stocks on Stockopedia. High yields can sometimes signal trouble, and in my opinion, often need to be approached with caution. So are any of the top three highest yielding stocks good dividend investments or should they be given a wide berth?
SSE (LON: SSE) (SSE.L) came in at number one spot, with a trailing yield of an immense 6.55%. The utility giant’s share price has pulled back by around 10% over the last four months, and that has pushed the yield up to a high level. Is that yield sustainable or this a yield trap?
A good place to start when analysing dividend stocks, is to look at the company’s dividend policy. A little digging reveals that SSE places a strong focus on rewarding shareholders with dividends, stating 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.”
A statement like that is a huge positive, in my opinion, and it suggests that management acknowledges the importance of dividends.
The group also has an excellent dividend growth track record, having increased its dividend every year over the last decade, at a compound annual growth rate (CAGR) of a healthy 5.2%. A strong track record of dividend increases is another positive.
On the negative side, SSE generated adjusted earnings per share in FY2017 of 125.7p, which covered the 91.3p dividend 1.38 times. For FY2018, City analysts expect earnings of 116.2p, which would provide coverage of 1.23 times. Given that a dividend coverage ratio under 1.5 is generally considered to be risky, SSE is clearly not the perfect dividend stock.
However, in its 20th July trading statement, the company made several references to the dividend.
First, SSE confirmed that it is “continuing to target an increase in the full-year dividend for 2017/18 of at least RPI inflation, with annual increases thereafter of at least RPI inflation also being targeted.”
Second, it stated that it is “continuing to work to keep dividend cover for 2017/18 within the expected range of around 1.2-1.4 times, although as previously indicated, it remains likely to be towards the bottom of that range.”
Third, the company commented: “Our priorities remain to support positive outcomes for customers, provide reliable and sustainable energy and deliver annual dividend growth for investors that at least keeps pace with inflation.”
Looking at those statements, management appears to be committed to the dividend, and therefore I expect the company to raise its dividend in line with RPI inflation in the near term.
Coming in at second spot, was Vodafone (LON: VOD) (VOD.L) with a dividend yield of 6.45%.
Vodafone used to declare its dividend in sterling, but last year switched to euros, to align the group’s shareholder returns with the primary currency in which it generates free cash flow.
While the dividend yield is high, Vodafone is not a dividend stock that interests me. Dividend coverage has been low for several years now, and shows no signs of a recovery in the short term. Indeed, City analysts forecast earnings per share of €0.086 this year, which would give coverage of just 0.57 times. That consensus earnings figure also results in a lofty forward looking P/E ratio of 27.3 times, which I can’t justify, given that the company is struggling to grow its top line, has high debt levels, and faces strong competition from rivals. Vodafone is a dividend stock I’ll be passing on.
Publishing and education company Pearson (LON: PSON) (PSON.L) came in at third place with a dividend yield of 6.44% (that’s calculated by Stockopedia on a trailing twelve month data basis).
However, a closer inspection of the yield reveals that investors buying the stock now, won’t receive a dividend yield anywhere near that going forward.
Pearson has been struggling in recent years, releasing successive profit warnings on the back of a drop in demand for its physical textbooks, and a shift towards online education. In its 4th August half-year report, Pearson announced an interim dividend cut of a staggering 72%, meaning that last year’s interim dividend of 18p, was cut to just 5p.
City analysts forecast a full-year dividend payout of 18.7p, which at the current share price, equates to a yield of 3.1%. Dividend cuts are a dividend investor’s worst enemy in my opinion, and with that in mind, this is a dividend stock to steer well clear of in my view.
Disclosure: Edward Sheldon, CFA has no position in any shares mentioned.
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.