As I write, there are no fewer than nine stocks in the FTSE 100 with 2019 forecast dividend yields of more than 8%. Are these stocks dividend traps, or bargain buys for income hunters? I’ve taken a closer look at five of these companies.
As safe as houses?
My sums indicate that housebuilder Persimmon has the highest dividend yield in the FTSE, with a 2019 forecast yield of 10.8%.
I am confident this payout will be made in full. But this year’s expected payout of 235p per share isn’t an ordinary dividend. Instead, it’s part of the group’s plan to return surplus cash to shareholders.
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The current plan shows another payout of 235p in 2020, followed by a 110p payout in 2021. After that, there’s no guidance.
As I mentioned recently, I’m concerned that Persimmon’s management might be focusing too much on the short term. I’d choose another housebuilder.
Should you bet on British Gas?
Centrica is a stock that everyone loves to hate. But as I discussed in a recent article, the company’s performance actually improved last year.
My sums also suggested that last year’s 12p per share payout was covered by free cash flow.
However, the numbers look a lot tighter for 2019. City analysts expect falling earnings to trigger a 14% dividend cut. That gives the stock a yield of 9%.
I think a bigger cut may be necessary, but I still see this as a possible recovery buy.
Another 10% housebuilder
Like Persimmon, Taylor Wimpey has a lot of spare cash to return to shareholders. The stock currently offers a 2019 forecast yield of 10%.
I like this firm for its five-star HBF survey score. This suggests that customers are happier with their homes than they are with those of Persimmon, which scored three stars in the latest home builders’ survey.
However, my reservations about Taylor Wimpey’s dividend are the same. This year’s payout of 18p per share looks very safe, but there’s no commitment for the future beyond the board’s “intention to make material further cash returns in 2020 and beyond”.
I need a holiday
Shares in European holiday group TUI AG have fallen by 60% since May last year. The company has already issued two profit warnings in 2019.
In February, TUI warned of weaker profit margins on summer bookings for 2019. Last week saw the firm cut earnings forecasts by 17% due to the impact of the Boeing 737 MAX grounding.
This slump has left the stock trading on 7.1 times 2019 forecast earnings, with an 8.8% yield.
If management maintains the link between the dividend and profits, a dividend cut may be necessary this year. But in my view, this business remains fundamentally sound and could be a good long-term buy.
Digging deep
Russian mining and steel group Evraz paid out $1,556m in dividends last year, giving the stock a trailing dividend yield of about 13%. This record payout seems unlikely to be repeated.
Broker forecasts for 2019 suggest a payout of $1,111m, followed by a distribution of about $880m in 2020. These numbers give Evraz stock a 2019 forecast yield of 9.2% and a 2020 yield of 7.3%.
That’s nothing to be ashamed of. But this mining group carries more debt than its big FTSE 100 rivals and more political risk, thanks to its Russian ownership. I’d probably dig for dividends elsewhere.
