With June upon us, I have been thinking about what dividend shares I could add to my portfolio to boost my passive income streams. Here are four UK dividend shares currently offering a yield of 7% or higher that I would consider buying for my portfolio.
Direct Line
My first pick is Direct Line (LSE: DLG). The insurer currently offers a yield of 8.7%, so for £10,000 invested in it today I would hopefully be receiving almost £900 in annual dividends.
I think there are two ways of seeing the business. A bullish view looks at the relative stability of demand in its core business areas like motor and home insurance. The company’s long experience helps it price risks profitably rather than chasing sales volume for its own sake. Having a well-recognised brand can help Direct Line attract and retain customers while keeping marketing costs under control.
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But a more bearish approach to Direct Line might point to its declining business environment. Sales have been falling and rules introduced this year on renewal pricing could hurt profit margins at insurance companies. Indeed, Direct Line said a decline in gross written premiums in the first quarter reflected its efforts “to protect value in Motor and Home as those markets stabilised following the implementation of the FCA’s pricing practices reforms”.
In other words, it sounds like the company was willing to lose some business rather than accept it at a lower profit margin than before. So the pricing reforms seem to be having an impact on Direct Line’s sales, something that I expect to continue.
I think the bearish viewpoint on Direct Line makes a lot of sense. But I think it is also already factored into the Direct Line share price. That has fallen 14% in the past year, pushing the yield up to the current high level. That yield is sufficiently attractive to me that I would buy these dividend shares for my portfolio. I like the long-term elements of the bull case as well as the more immediate prospects of a juicy dividend yield.
Abrdn
I would also consider buying shares in investment manager Abrdn (LSE: ABDN), which yields 7.4%.
The company has had an unsettling few years, struggling to keep clients and reducing its dividend. That helps to explain why its dividend yield has been pushed higher – some investors have lost the confidence they once had in the company.
However, I think the dividend cut helps to make the payout more sustainable. The company has also been reshaping its portfolio of businesses as part of attempts to make more inroads among the potentially huge market of younger investors.
The business performance also seems to be turning the corner. Fee-based revenue grew by 6% last year and assets under management and administration also inched up. I do still see the possibility of capital outflows as a risk to business revenues and profits. But I think Abrdn’s experience, large customer base and improving profitability could lay the foundation for growing success in the coming years. That could be good news for the dividend.
Imperial Brands
With its 8.9% yield, tobacco maker Imperial Brands (LSE: IMB) is another income share I would consider for my portfolio this month.
Its collection of premium brands allows it to raise prices. That can help offset some of the impact on the business caused by declining cigarette demand in many markets. Although Imperial is trying to grow its market share in leading markets, in the long term I still expect it to be hit by falling volumes as fewer people smoke cigarettes. The full impact of that could still be years or decades down the road, however. Imperial’s brand portfolio could help it grow its non-cigarette product lines in coming years.
High yields often indicate elevated risks and I think that is true at Imperial. It is in a declining industry and lacks the scale of some huge competitors like Altria or British American Tobacco. But it remains a cash generation machine. The company has been reducing its debt and a 2020 dividend cut means the payout looks sustainable for the foreseeable future. Dividends are never guaranteed, but Imperial’s large yield is enough to make me own these dividend shares in my portfolio.
Persimmon
The fourth income share I would consider adding to my portfolio this month is builder Persimmon (LSE: PSN). Its dividend yield is in double figures, currently standing at 10.5%.
As with Imperial, I think investors are worried about the demand outlook for this company. A fall in selling prices could be triggered by a recession. That might be bad news both for sales and profits at Persimmon. However, I think there are reasons to be cheerful about the business. I think a shortage of housing means demand is likely to stay strong in coming years. Persimmon has navigated previous housing market falls and if prices do start to head downwards, it is well-positioned to adapt. Its high profit margins give it more flexibility on pricing than some competitors have.
If there is a severe housing crash, I expect profits to suffer and the dividend could be cut. However, its current size means the company may have space to make a dividend cut and still keep a fairly generous payout. That is why Persimmon is among the dividend shares I would consider adding to my portfolio this month.
7%+ yielding dividend shares
High yield often indicates investor concerns about risks. I think that is true for these four dividend shares.
But I also think the companies have positive points. Strong brands can help them achieve premium pricing levels, while buoyant cash flows can help support dividends. I would consider buying all four for my portfolio.
