Picture supply: Getty Photographs
Placing cash into just a few high-yield blue-chip dividend shares can generally be a profitable strategy to producing further earnings with out working to earn it.
However the strategy can have pitfalls too. Dividends will be reduce, for instance – and capital values may additionally fall. In spite of everything, a excessive yield can generally point out considerations about whether or not an organization will reduce its dividend in future. That may weigh on the share value – although some traders do very nicely by shopping for discount shares that in reality preserve their payouts.
Excessive hitters within the top-tier index
In the intervening time, the three highest yielding dividend shares within the FTSE 100 index are Authorized & Common (LSE: LGEN), Phoenix Group and Mondi.
They yield 8.0%, 7.3% and 6.8%, respectively.
So somebody who invested £5k evenly throughout the trio should be incomes a yield of seven.4%. That ought to translate into round £369 of dividends per 12 months.
Development potential
If the companies preserve their payouts, over 5 years that may add as much as some £1,845 of passive earnings.
However what in the event that they develop them?
Mondi has been holding its dividend flat. Weak pricing in some components of the paper market has hit earnings. So I anticipate the dividend might not develop within the subsequent a number of years.
Nonetheless, the long-term demand outlook for paper and packaging ought to be important. Mondi has deep manufacturing capabilities throughout many markets, in addition to a lot of present buyer relationships.
Against this, each Phoenix and Authorized & Common intention to develop their dividend per share yearly – and have finished that in recent times. Even when they each handle simply 2% per 12 months progress (consistent with Authorized & Common’s goal), that would add one other £50 or so of dividends over the approaching 5 years. That might imply the £5k invested right now should earn just below £1,900 in dividends throughout that interval.
Managing the dangers
Mondi’s difficult paper market just isn’t the one danger right here, although.
Phoenix and Authorized & Common are each in monetary companies. They each concentrate on the retirement finish of the market.
Concentrating two-thirds of the funding in the identical financial space is an pointless danger, I reckon, however an investor who already owns different shares may be capable of do this whereas nonetheless staying diversified.
A danger I see is a monetary market downturn hitting portfolio valuations. That would lead policyholders to drag funds from Phoenix and Authorized & Common, hurting earnings.
Authorized & Common faces different dangers. It plans to promote a big US enterprise. That may generate sizeable money that may assist fund dividends and share buybacks.
Nonetheless, additionally it is prone to take away a bit of present revenues. That would harm general profitability down the road.
Severe earnings technology potential
However Authorized & Common has strengths too. Like Phoenix, it has a confirmed enterprise mannequin and a big long-term consumer base.
Once more like Phoenix – the proprietor of Commonplace Life – Authorized & Common has a long-established, well-known client model that may assist it win and retain enterprise.
Over time, I see each — and Mondi — as dividend shares traders ought to take into account.
