20 Giants For A 6% Dividend Yield

Published in Investing on 18 May 2012

These 20 mega-cap firms pay a handsome income while you wait for growth.

As a staunch saver and investor, I'm really not fond of today's economic environment.

On one hand, no or low economic growth crimps business profits while, on the other, ultra-low interest rates and stubbornly high inflation keep undermining my cash's future buying power.

The tide is going out

Then again, I haven't felt super-confident as an investor for about two years. However, there have been two occasions in the past 12 months when my trigger finger got very itchy indeed.

The first was during the depths of last year's slump, when the blue-chip FTSE 100 index of elite British businesses crashed to 4,791 on 9 August, marking its 2011 low. Alas, being on holiday at the time, I was unable to take advantage of this obvious buying opportunity.

This week has been the second time that my trigger finger has hovered over the 'Buy' button. However, given the ongoing crises in Greece and Spain, I've decided to keep my powder dry and await further price falls.

Twenty 'yield monsters'

Although I've held fire on increasing my exposure to shares, I do agree with other investors that recent market falls have exposed some deep value, especially among the UK's biggest listed companies.

In fact, for income-seeking investors seeking to play a long game, there are some remarkably attractive blue-chip 'safe havens' out there right now.

To show you what I mean, I conducted a value trawl of the FTSE 100 on Thursday morning. Using a simple filter, I produced a list of 25 companies with market values above £2 billion and dividend yields above 4.5% a year.

I then weeded out five firms with low dividend cover or high earnings ratings to leave a 'top 20' list of dividend giants. Here are these 20 'yield monsters', sorted from highest to lowest dividend yield:

NameValue (£bn)Share price (p)Earnings ratingDividend yield (%)Dividend coverBeta
Resolution (LSE: RSL)2.8198.04.09.8%2.61.0
Aviva (LSE: AV)8.2271.416.59.3%0.71.7
RSA Insurance (LSE: RSA)3.699.68.49.1%1.31.0
BAE Systems (LSE: BA)8.8274.96.06.9%2.41.0
AstraZeneca (LSE: AZN)33.42,636.05.86.7%2.60.8
ICAP (LSE: IAP)2.2340.28.46.5%1.81.3
SSE (LSE: SSE)12.61,330.011.86.0%1.40.5
National Grid (LSE: NG)23.8668.513.05.9%1.30.3
Legal & General (LSE: LGEN)6.5109.18.95.8%1.91.5
J Sainsbury (LSE: SBRY)5.6296.110.75.4%1.70.8
Vodafone (LSE: VOD)83.0164.810.05.3%1.90.5
Royal Dutch Shell (LSE: RDSB)128.02,
Centrica (LSE: CNA)16.0308.012.05.0%1.70.7
GlaxoSmithKline (LSE: GSK)71.61,425.012.54.9%1.60.5
Drax (LSE: DRX)2.1570.010.14.9%2.00.6
Marks & Spencer (LSE: MKS)5.6346.910.04.9%2.10.8
HSBC (LSE: HSBA)97.0524.19.34.8%2.21.2
Tesco (LSE: TSCO)25.6315.58.54.6%2.50.7
BP (LSE: BP)76.0395.34.74.6%4.71.0
CRH (LSE: CRH)8.01,
MINIMUM2.1 4.04.5%0.70.3
MAXIMUM128.0 16.59.8%4.71.7

Source: Digital Look, morning of 17/05/12

Big businesses mean big dividends

As you can see, these companies' market values range from over £2 billion (Drax) to £128 billion (Royal Dutch Shell), so all are corporate giants.

Also, while their price-to-earnings (P/E) ratios vary from 4.0 to 16.5, the average P/E for the whole portfolio is a mere 9.2. Thus, these are not expensive shares, relative to the post-tax earnings they generate as a whole.

However, the main attraction of these big firms is their high, well-covered dividends. Their dividend yields range from 4.5% at CRH to a whopping 9.8% at Resolution. Overall, the average dividend yield (from investing 1/20th of our pot into each business) is an impressive 6% a year.

What's more, at all firms bar one, these regular cash payouts are well covered by earnings. Dividend cover ranges from 0.7 times at Aviva (expected to rise above 1 this year) to a hefty 4.7 times at BP. Overall, the average dividend cover is more than two times earnings, which is a comfortable cushion.

What's more, this portfolio is less volatile than the UK stock market as a whole. Although individual betas (a measure of price volatility relative to the market) range from a 'dull' 0.3 to a 'racy' 1.7, the overall beta comes in at 0.9. Hence, the volatility of this collection of 20 shares has historically been lower than the London market.


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In comes the income

While this appears to be a powerful portfolio for income, it does have one drawback. It is overly focused on a few market sectors and, therefore, is not terribly well diversified.

For example, it includes:

  • Four insurers (Aviva, Legal & General, Resolution and RSA).
  • Four power/energy companies (Centrica, Drax, National Grid and SSE).
  • Three retailers (J Sainsbury, Marks & Spencer and Tesco).
  • Two pharmaceutical firms (AstraZeneca and GlaxoSmithKline).
  • Two oil giants (BP and Royal Dutch Shell).
  • Two more financial firms (HSBC and ICAP).
  • Telecoms Goliath Vodafone.
  • Irish cement firm CRH.
  • Defence contractor BAE Systems.

Hence, despite being spread across nine sectors, this portfolio has heavy exposure to the financial, energy/power/oil, retailing and drug sectors.

Despite this concentration, you wouldn't need to put a gun to my head to make me buy this portfolio. That's because an investment of £1,000 in each of these 20 businesses would pull in dividend income of £1,200 a year (6% of the £20,000 total). What's more, this income would be tax-free for basic-rate taxpayers, thanks to the notional 10% tax credit attached to dividends.

In summary, this is the kind of approach I intend to take when building my new portfolio. Indeed, with its focus on income and safety first, I reckon that this 20-share family will thrash the wider market over the next decade.

Finally, if you're interested in building wealth from blue-chip shares, then you must download a copy of Top Sectors For 2012, The Motley Fool's latest free guide for intelligent investors. It picks out three sexy sectors to help to boost your investment returns, so grab your copy now!

Cliff owns shares in GlaxoSmithKline. The Motley Fool owns shares in Tesco.

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CunningCliff 18 May 2012 , 4:08pm

Note that these FTSE 100 fell on Thursday and Friday, thus lowering these share prices -- and increasing their dividend yields -- even more... :0)


UncleEbenezer 18 May 2012 , 10:41pm

Topped up three shareholdings this afternoon (one of them on the above list). Bargain!

But not the big fallers. Banks and insurers could bounce back strongly leaving a bargain missed, but the risk seems higher too. What I've just bought is good shares that have fallen just a little with the sweep of the market.

DennisDenuto 19 May 2012 , 2:13am

I bought (more) BAE and added MYI and GSK yesterday. I'm holding some cash and am planning on dripping it in over the next two or three months on certain trigger points. ICAP is potentially next for me as I like the business, dividend cover is a little thin though.

anthonyms 19 May 2012 , 7:20am

Shouldn't the title be "20 giants for a 4.5% dividend yield" or am I missing something about this?

newtona2 19 May 2012 , 9:02am

anthonyms - yes, you must have missed this line;

"Overall, the average dividend yield (from investing 1/20th of our pot into each business) is an impressive 6% a year."

So, 6 % from the portfolio, not from every element of it.

For me, this is quite a compelling basket. I'd dip a little lower into some smaller mid-caps with similar yields and replace some of the sector duplicatin, especially as so much of that duplication is in "financials". I can live with two big Oils, and possibly four Energy, but that really makes 6 Energy, so too high for me here too.

I'd perhaps include Interserve, Morgan Sindall and Marstons in exchange for three of these.

SevenPillars 19 May 2012 , 1:26pm

A few of these have a market cap that is getting close to the £2billion level, once they go below it should they be dismissed? Most may well survive further market falls on the basis of their market cap, but a few of them, especially the insurers could be in for a bumpy euro ride over the next month or two.

I'm reminded of Man Group. Not so long ago they would have qualified for this list, div yield now around 18%, market cap of £1.3billion, just hit a year low of 75.3p, something very strange going on with this company. It is either an incredible bargain or heading for a bust. A hundred and fifty grand in this will get you a divi better than the national average salary right now - assuming it survives (the divi and the company that is).

ArkWelder 20 May 2012 , 5:55pm

Which companies on the list are the safe havens? If all of them were then you can be sure that institutional investors would be happy to have already bid-up their prices, reducing the yields in the process.

In the case of Resolution, perhaps it is the company structure that puts them off: the assets are not held directly by the listed company, but by a Guernsey-registered limited partnership; the management also operate through a spearate company which will enable them to have interests in other operations, meaning that their attention is not necessarily always on the running of RSL.

phlpms 21 May 2012 , 4:12pm

Is there a reason why BATS and IMT are out of favour? I know they haven't been doing well lately but the divs are good.

longpod 21 May 2012 , 6:20pm

"You wouldn't need to put a gun to my head to make me buy this portfolio"

So why do you only own one of them Cliff?

dukindiva 21 May 2012 , 9:43pm

I bought seven of the 'monsters' when then FTSE was at 4900 (only one with a value of less than 20bn ... in these times you can't be too careful) but some of them are now falling back to purchase price levels, so it's only the divis that are making me money so far. If I top up, it will be mostly in other sectors.

Cliff, which filter did you use to get the beta & div cover data?

thairet 22 May 2012 , 5:21am

Now is the time to play my fun "divi-game" as I highlighted in a recent post. I use 25% of my portfolio to buy approaching final (or highest DPS) ex-d stock. With prudence (DYOR rigorously a la Weiss and Graham for value) and a portion of your wealth / existing portfolio, going for the higher return prior to ex-d then waiting until that blue chip or 250 plc re-bounds due to the normal market volatility and sell off for a profit. After the Greek debacle I will do it again with Spain etc as the market sheep buy high and sell low I will follow the MF's God Mr Buffett and then vacation in Greece , Spain etc very cheaply thank you.

Market volatility is a given! Capitalise on it!…..but you do need to be on the ball and have time to research, research, research and you still make mistakes (I still hold 5000 shares in HMV I bought in 2010). I am long in the tooth, but a novice 3-year investor and would love some feedback from you gurus out there to criticise this approach with ±20-25% of my portfolio. The rest in the main currently follows your table above Cliff, but I diversify sectors as trends dictate.

Re DYOR...As an aside I have held HSD for three years and I am suffering approx £5000 loss on initial investment while the market is as it is now…however I have garnered £4000 divis in that time. DYOR following value guidelines is a sound approach to me. HSD fundamentals have not changed, only market trend and current institutional investor sentiment.


CunningCliff 22 May 2012 , 11:18am

anthonyms, "Shouldn't the title be "20 giants for a 4.5% dividend yield" or am I missing something about this?"

4.5% is the lowest dividend yield of these 20 firms (see my table above). As I explained in the text, the average yield is 6% a year.

longpod, "So why do you only own one of them Cliff?"

As I explained to you last week, longpod, I am expecting big market falls later this year. If the Greek meltdown spreads to Spain, then even these beautiful blue chips will trade at considerably lower prices than they do today.

In short, I'm planning for a once-in-a-lifetime plunge into the market sometime in 2012/13!


CunningCliff 22 May 2012 , 11:19am

dukindiva, "Cliff, which filter did you use to get the beta & div cover data?"

This: http://www.digitallook.com/dlmedia/screener


RegDiversify 22 May 2012 , 12:35pm

I already hold hold fifteen of your top twenty. To avoid over exposure to a particular sector I would eliminate Resolution and Drax. As for supermarkets there are three better than M&S. I would also forget about banks and cement.

paulmontley 23 May 2012 , 10:09pm

hi guy n dolls,

love this site , investing in uk divdends paying companies.
only can only go through nonmee broker as i reside in ireland.
thanks for the info and the free download info
priceless !!!!


RobinnBanks 27 May 2012 , 1:38pm

With the possible exception of Playboy or Ann Summers, companies are not 'sexy'; if you think they are, you ain't doing it right!

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