I like to invest in blue-chip companies with strong, proven business models and attractive valuations. So although I like the sort of high dividend yield available on some UK shares right now, I do not buy based on that alone.
That said, the three FTSE 100 companies below each offer a current yield well above 9% right now.
I already own two of these UK shares. Should I hang on to them – and ought I to buy the third?
British American Tobacco
Cigarette maker British American Tobacco (LSE: BATS) is massively profitable and generates big free cash flows. Making cigarettes is cheap but their addictive nature combined with British American’s premium branding means that they can be sold at an attractive profit margin.
That helps explain this UK share’s strong dividend characteristics: a 9.7% yield and annual increases stretching back decades.
But if the business is a good one, why is the yield so high?
After all, a high yield is often a red flag that investors fear a dividend cut. No payout is ever guaranteed to last, no matter how strong its history.
In the case of British American, a critical factor is fears that declining cigarette consumption will hurt revenues and profits.
British American’s cigarette sales are falling, but I think its non-cigarette business could help take up some of the slack in future. Meanwhile I actually think the cigarettes business, although declining, could generate sizeable profits for several decades yet.
I have no plans to eject this UK share from my portfolio.
Vodafone
I said above that a high yield can be a red flag that the City is pencilling in the possibility of a cut.
Case in point: Vodafone (LSE: VOD).
The shares have a current yield of 11.2%, the highest of any FTSE 100 member. But the prospective yield for next year is half of that after the company announced this month that it plans to cut the dividend in half from next year onwards.
Arguably, management has been making the right moves.
It has been reducing the business size and cutting debt. By reducing the dividend it can show more financial discipline while still offering a yield of 5.6%, higher than many blue-chip UK shares.
But the shares have moved sideways since the announcement. They have more than halved in five years. I see risks here, including the debt pile.
Yet this is a large, proven, profitable business. I plan to hold.
Phoenix
At the moment, financial services group Phoenix yields 9.7%.
That is even after a jump of almost 10% in the share price as I write this on Friday morning (22 March) after the company released its annual results.
Phoenix has raised its dividend annually in recent years and announced a 2.5% increase in today’s results.
The company announced a “progressive and sustainable dividend policy” without providing much detail on what that meant.
Still, the business operates in a market with resilient demand, has a large customer base and is a proven cash generator.
I see a risk that rocky financial markets could hurt profits. But I would be happy to buy this high-yield UK share if I had cash to invest.
This post was originally published on Motley Fool
