Interactive Investor

10 FTSE 100 stocks with big dividends

18th November 2021 12:33

by Ben Hobson from Stockopedia

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Stockopedia’s Ben Hobson has screened the market for high-yielding large companies that might interest value investors.

Big diviend payments 600

During November, the FTSE All-Share index finally crept its way back to levels not seen since before the Covid crash in early 2020. It’s been a long haul for the fund industry’s most popular benchmark.

The FTSE All-Share is market-cap weighted so is heavily influenced by large-cap companies. But over the past 20 months, large-caps haven’t generally done as well as their mid-cap and small-cap peers.

Yet one large-cap strategy that has been interesting to watch this year is one that looks for large-cap value stocks with above average dividend yields.

There has been a lot of speculation recently about the re-emergence of value as a factor in the market. After years of conditions that have worked well for growth stocks, it seems like value might be coming back. Certainly, the turmoil caused by Covid has caused the kind of market disruption that value tends to thrive in.

The strategy itself is one that was designed by the US investment legend, James O’Shaughnessy. He rose to fame in the 1990s after spending years studying the world’s most extensive databases of corporate financial records. He wanted to figure out which strategies really worked the best. In particular, he wanted to find approaches that investors could stick with through bull and bear markets.

O’Shaughnessy’s Cornerstone Value approach was built on the idea that value investing works best in large-cap stocks. It uses the dividend yield as a proxy for value. The idea is that the higher the yield, the more likely it is that the share price has fallen to a point where it’s not properly reflecting a fair valuation.

The strategy then looks for companies with above-average sales and cash flow and high levels of share liquidity. This aims to ensure the dividend is well funded and the market hasn’t lost faith in the business.

A model of O’Shaughnessy’s Cornerstone Value strategy shows that it has kept pace with the recovering market this year. But what is eye-catching are the high yields. Could some of these large-cap value stocks be hitting a dividend sweet spot?

Name

Mkt Cap (£m)

Dividend Yield (%)

Sales (£m)

Operating Cash Flow per share

Sector

EVRAZ (LSE:EVR)

8,723.0

13.1

8,154.5

1.30

Basic Materials

BHP (LSE:BHP)

96,023.1

11.8

45,294.6

4.00

Basic Materials

Rio Tinto (LSE:RIO)

72,111.8

11.3

43,443.8

10.93

Basic Materials

M&G (LSE:MNG)

5,194.6

9.2

21,982.0

0.80

Financials

Imperial Brands (LSE:IMB)

14,849.1

8.9

32,791.0

2.28

Consumer Defensives

British American Tobacco (LSE:BATS)

59,511.9

8.2

25,680.0

3.68

Consumer Defensives

Phoenix Group (LSE:PHNX)

6,648.7

7.3

28,939.0

4.50

Financials

Polymetal International (LSE:POLY)

7,096.7

6.7

2,237.3

1.95

Basic Materials

Persimmon (LSE:PSN)

8,641.2

6.7

3,978.6

3.93

Consumer Cyclicals

Vodafone (LSE:VOD)

32,248.0

6.4

37,826.4

0.51

Telecoms

Mining majors such as EVRAZ (LSE:EVR), BHP (LSE:BHP), Rio Tinto (LSE:RIO)and Polymetal International (LSE:POLY)have had a roller coaster year or so. Yet the dividends on some of these stocks are very high at the moment, as the effects of surging commodity prices continue to be felt. Yields are also high in ‘sin stocks’ such as Imperial Brands (LSE:IMB) and British American Tobacco (LSE:BATS), as well as financials like M&G (LSE:MNG)and Phoenix Group (LSE:PHNX).

For income investors, high yields are naturally appealing, but excessive yields can be risky. O’Shaughnessy’s use of yield as a proxy for value in this strategy is balanced by his insistence that the companies are generating lots of income.

One of the lessons from this strategy is that, whether you are dividend investing or a value investor, yield alone isn’t a reason to invest in a share. What’s equally important is whether the company is in solid shape and generating the profits needed to fund its dividend. Only then can you start to take some confidence in the possibility that the dividend is sustainable and that the market might actually be mispricing the shares.

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