These high-yield FTSE 100 shares have attracted my attention recently. Which one would be the better buy this month for dividend income?
Admiral Group
At 4.7%, the yield on Admiral Group (LSE:ADM) shares comfortably beats the 3.8% FTSE index average. This reflects City expectations that dividends will rise again after they were slashed more than 40% (to 157p per share) last year.
But the motor insurance industry remains under huge pressure. And so I have to consider the possibility that the company could struggle to meet this forecast.
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High cost inflation, which smacked profits across the industry last year, remains a huge problem for Admiral. On top of this, the search for lower premiums by insurance customers is intensifying. Commercial insurance specialist Zego says that Google searches for ‘cheaper car insurance’ have rocketed 125% higher in the last 12 months.
Encouragingly, revenues and pre-tax profits at Admiral rose 21% and 4% in the first half of 2023 thanks to price hikes on its products. Its excellent brand strength (through banners like Admiral, Elephant, and Diamond) could allow it to continue performing strongly, too.
But I have my doubts. With the UK economy cooling and the cost-of-living crisis dragging on, the company’s ability to keep raising premiums will likely prove limited. Thus its ability to grow dividends to 111.3p per share, as analysts expect, looks highly optimistic.
Worryingly, Admiral decided to cut its dividend for the first half of 2023 by 15%, to 51p per share. It also saw its Solvency II ratio fall 3% year on year to 182%, which is another bad omen for near-term payouts.
It’s also important to note that this year’s estimated dividend is barely covered by estimated earnings of 119p per share. On balance, I don’t think Admiral looks like a dividend stock I’d want to buy today.
National Grid
One such company I’m considering buying instead is National Grid (LSE:NG). One reason is because a predicted dividend of 57.8p per share carries an even larger dividend yield than that of Admiral. This sits at a FTSE average-smashing 5.9%.
Another reason is the highly defensive nature of the firm’s operations. This gives it the earnings stability and reliable cash flows that enable it to pay above-average dividends, and to increase payouts almost every year. This means that weak dividend cover of 1.2 times for 2023 isn’t a dealbreaker for me.
Britain’s electricity grid needs to be kept in good working order regardless of broader economic conditions. And what’s more, National Grid has a monopoly on this, which provides profits with an extra layer of security.
Like any UK share, the company isn’t without its risks. Of most concern to me is its high net debt pile, which rose above £40bn as of March. This reflects the capital-intensive nature of the company’s operations.
But I don’t believe this will affect National Grid’s ability to pay dividends, at least in the near term. This is because its long-term debt structure allows it to manage its financial obligations while still growing shareholder payouts.
Considering National Grid’s steadily growing asset base and investments in clean energy, I think dividends here could rise steadily for years to come.
