UK shares are a good place to look for big dividend yields. That’s partially because UK stocks just aren’t that popular with an international market. And when share prices are depressed, we see higher dividend yields.
But that’s not a bad thing for those of us investing in UK stocks. After all, many of us invest for passive income. And there’s no shortage of companies offering sizeable yields on the FTSE 100.
Sustainability
We want big dividend yields, but we need to know if the yield is sustainable. The first place to look is the dividend coverage ratio (DCR) — a financial metric that measures the number of times a company can pay dividends to its shareholders.
Anything around two is generally considered healthy. But I don’t discount firms with lower DCRs. It’s also important to pair this data with market forecasts. For example, housebuilders generally had strong DCRs a year ago, but the sector has been hammered over the past 12 months. As profits have fallen, so have the coverage ratios.
So when we see a good yield, it’s important to look beyond it and explore whether it’s sustainable.
Big-yielding UK stocks
So what are the best dividend stocks to buy in the UK? Well, there are plenty of high-yielding stocks. Here are just a few.
|
Stock |
Dividend yield |
|
Aviva |
7.5% |
|
Barratt Developments |
7.5% |
|
Close Brothers Group |
7.25% |
|
Legal & General |
8.4% |
|
M&G |
9.9% |
|
Phoenix Group |
8.8% |
|
Rio Tinto |
8% |
Considering the average dividend yield for the FTSE 100 is just 3.6%, some of these stocks are offering huge returns.
But it’s worth highlighting that many stocks with big yields offer little in the way of share price growth. That’s partially because they reward shareholders primarily with dividends instead of share buybacks.
However, that’s fine for many investors, including myself. After all, many of us practice a compound returns strategy that requires us to reinvest our dividends year after year.
Where’s my money going?
When it comes to personal choice, my top pick is Legal & General. Its DCR is 1.98 and it has a particularly impressive solvency ratio of 236% — the latter is getting a lot of attention in the wake of the mini US financial crisis earlier this year.
It’s not an exciting firm, but it has a broad offering across the sector, primarily in insurance. The company also has an investment arm, which didn’t perform all that well last year — but I’m confident this will pick up.
I’m also a big fan of Phoenix Group. Once again, it’s not an exciting company, but it’s the UK’s largest long-term savings and retirement business. It has a business model designed to be resilient throughout the economic cycle and has traditionally focused on acquiring and managing maturing products.
In 2022, the DCR was 1.6. It could be stronger, but savings and retirement business tend to have strong cash flows. So it’s not something I worry about too much.
Collectively, these two stocks could deliver a 8.6% dividend yield — more than my target. It’s not guaranteed, but it’s why they’ve both been added to my portfolio.
The post I’d target an 8.5% dividend yield with these UK shares! appeared first on The Motley Fool UK.
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James Fox has positions in Aviva Plc, Barratt Developments Plc, Legal & General Group, and Phoenix Group Holdings Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
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