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He FTSE 100 It's loaded with stocks with high dividend income. I know, because I've been filling my boots lately.
That's why I was interested to see today's report from Derren Nathan, head of equity research at Hargreaves Lansdown. Says the UK's blue-chip index is “fertile hunting ground for attractive and sustainable yields”and choose your three favorites.
I hold one of them – Lloyds Banking Group (LSE: LLOY) – and I wouldn't be without it. Shares of the top bank have soared a whopping 48.79% over the past year. The trailing return of 4.44% has pushed my one-year total return above 50%.
That underestimates your earning potential. As Nathan points out, it's actually been a bit higher over the last decade. The expected return is 5.5%.
Lloyds is a brilliant dividend growth stock
He said the cost of living crisis has not had the expected impact on loan defaults. “There is every reason to believe its capital strength measures will remain above target, even if earnings decline a bit against some strong comparators.”
Nathan warned that Lloyds could come under pressure in the short term. Falling interest rates could squeeze margins, plus there's the investigation into mis-selling auto finance. Like me, Nathan is unfazed and concludes that: “Overall, current performance appears defendable, with room for further dividend growth in the medium term, as well as significant share buybacks.”
Nathan also highlights the oil and gas giant. Shell (LSE: SHEL). He has attracted criticism for relaxing net zero targets, but he says: “Renewed discipline in investment decisions in both fossil fuel projects and low-carbon initiatives means payouts to shareholders are likely to remain high on the priority list.”
Crucially, Shell has one of the strongest balance sheets among its peers which, together with cost-cutting measures, supports a 4.4% yield. Nathan says: “Weak oil prices threaten to put some pressure on cash flow, but there should still be enough to cover generous dividends and new buybacks, even at current prices.”
Shell shares have also caught my attention
I'm with Nathan and would love to join Shell today. However, I already have a large stake in the rival energy giant. PAwhich yields 5.59%. I'll stick with that.
Nathan's latest income pick is the owner of British Gas Central (LSE: CNA). I've looked at this myself from time to time. So far I'm not convinced. I didn't like the way it took a two-year break from paying dividends during the pandemic. Most FTSE 100 companies restored theirs at a much faster pace.
Nathan says dividends are still well below pre-pandemic levels, but its 4.2% yield is still worth a look for income investors.
He says the dividend appears to be on solid ground. However, he adds that investors should be aware of Centrica's plans to invest between £600m and £800m a year in the energy transition. “On the one hand, it is an opportunity for growth. On the other hand, it is a risk to cash flows if returns are not generated as quickly as planned.”
Personally, I am concerned about the speed at which British Gas is losing customers to its rivals. This could accelerate as energy switching becomes feasible again. I think I'll leave Centrica aside. Still, two out of three are not bad.
