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As a veteran value investor with 35 years’ experience, my stock-selection criteria are very well-established. For my family portfolio, I’m always looking out for cheap shares in solid companies that pay attractive dividend yields. And because most London-listed stocks don’t pay dividends, I tend to concentrate my search within the blue-chip FTSE 100 index.
High passive income from the FTSE 100
There are three reasons why I like buying shares with high dividend yields. First, these cash returns help to offset share-price declines during falling markets. Second, I can choose what to do with these payouts (I can reinvest them by buying more shares, or spend this cash). Third, history shows that roughly half of the long-term returns from UK shares comes from cash dividends. And total dividends paid by FTSE 100 firms are expected to reach £81.2bn in 2022, which is a terrific torrent of cash to grab.
Four Footsie firms with market-thrashing dividend yields
In my latest trawl through the FTSE 100, I used a simple stock screener to find large-cap shares with dividend yields of at least 8% a year. This search quickly found these four high-yielding Footsie stocks (sorted from highest to lowest dividend yield):
| Company | Sector | Share price | 12-month change | Market value | P/E | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Housebuilding | 2,244p | -30.7% | £7.2bn | 9.1 | 11.0% | 10.5% | 1.0 |
| Rio Tinto | Mining | 5,951.2p | -3.1% | £100.8bn | 5.7 | 17.4% | 9.7% | 1.8 |
| Imperial Brands | Tobacco | 1,796p | 11.4% | £17.0bn | 8.4 | 11.9% | 8.9% | 1.3 |
| M&G | Financial | 219.4p | -11.8% | £5.6bn | 68.1 | 1.5% | 8.3% | 0.2 |
As you can see, these four stocks offer yearly dividend yields ranging from 10.5% at housebuilder Persimmon to 8.3% at asset manager M&G. The average dividend yield across all four shares comes to a juicy 9.4% a year (versus under 4% a year for the wider FTSE 100).
Interestingly, though these shares pay high cash yields, these four companies are all very different. In terms of size, mega-miner Rio Tinto is a near-£101bn colossus, while FTSE 100 minnow M&G is valued at under £6bn. What’s more, they all come from different industry/market sectors (property, natural resources, consumer goods, and financials).
Another point I’d make is that at one of these FTSE 100 shares (M&G), the company’s earnings yield is too low to cover its dividend yield. But that’s because these are trailing (backward-looking) figures — and M&G’s forecast 2022 earnings should easily cover its predicted cash returns to shareholders.
Which of these high-yielders would I buy today?
I don’t own any of these four FTSE 100 shares today, but which would I buy now? My answer is simple: to diversify (spread around) my sources of passive income, I’d gladly buy all four of these dividend dynamos right now. And that’s despite my worries over Covid-19, red-hot inflation, rising interest rates, war in Ukraine, and China’s slowing economic growth!
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