When searching for new companies to add to my income portfolio, I like to start with the highest-yielding dividend stocks. A high yield can often be a warning sign. But every once in a while, there are businesses that can sustain an enormous payout. And that opens the door to massive income generation opportunities.
With that in mind, I’ve found four FTSE 100 dividend stocks that I’m considering for my income portfolio. Let’s explore.
The rise of commodities
Inflation may be wreaking havoc on everyday expenses, but for some companies like Rio Tinto and BHP Group, it’s proven to be quite the tailwind. As a reminder, these are some of the largest mining companies in the world. Both have been boosting their investments in projects related to renewable energy technologies – specifically focusing on metals like copper, nickel, and lithium, among others.
With demand for these raw materials skyrocketing thanks to the accelerated shift towards electric vehicles and capturing green energy sources, profit margins have been getting wider. This effect is only amplified by inflation pushing up commodity prices. As such, these dividend stocks now have a yield of around 9%!
There are, of course, risks to consider. Both operate in a cyclical industry whose product prices are determined by the market. That means neither one of these businesses have or ever will have pricing power. As mining is a largely fixed-cost enterprise, if the prices of these metals fall due to reduced demand or surplus supply, profit margins will take a significant hit with little recourse available.
Depending on the severity of this margin squeezing effect, the dividends could become compromised. But personally, I don’t see the demand for battery metals dropping any time soon, nor the supply catching up. That’s why I’m keen to add these two dividend stocks to my income portfolio today, despite the risks.
The Marmite of dividend stocks
Tobacco companies are often boycotted by some investors due to their ethical issues. But ethics aside, I can’t deny the popularity and addictive qualities of their products. Over the years, Imperial Brands and British American Tobacco have garnered enormous pricing power. And that has translated into dividend yields of 8% and 7%, respectively.
With the world becoming more health aware, the popularity of cigarettes in the UK has started to dwindle. But with new, less harmful products like e-cigarettes entering the market, these businesses have proven to be resilient to the shifting landscape.
That doesn’t mean there aren’t any risks, of course. Selling a product considered to be controversial has led to rising levels of regulatory oversight and restrictions. Future increased limitations on nicotine content could start to hamper sales as this is what makes these products so addictive in the first place. Needless to say, if the revenue starts falling, the yields will likely suffer.
However, while the looming regulatory threat is concerning, these dividend stocks have proven to be an enormous source of passive income over the years and could stay that way in the future. That’s why I’m considering them for my portfolio today.
But these aren’t the only dividend stocks on my radar this week…
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.
