Dividend stocks can be a great way to produce cash flows in my portfolio. Particularly today, as inflation is soaring, I’m looking for high dividend yield stocks in the FTSE 100. Indeed, the Bank of England expects consumer price rises to reach over 7% by spring this year.
With this in mind, here are three stocks I’d buy today with expected dividend yields above inflation.
FTSE 100 dividend stocks
I’d start by investing more in Rio Tinto, the global miner focusing on iron ore, aluminium and copper. The dividend yield forecast is a huge 9% for 2022, so way above the expected inflation rate. Aside from the dividend, one of the reasons I own Rio Tinto shares is that the products it mines are important for decarbonisation efforts. For example, electric vehicles require substantial amounts of copper as the metal is used in the batteries, wires, motors and more.
One thing to note about Rio Tinto is the cyclicality of the business. Commodity prices can be volatile, and as such, Rio Tinto’s earnings can be too. Therefore, my dividend payments will also be volatile. Nevertheless, I think the dividend yield is high enough to compensate me for this risk.
The next company I’d buy is Persimmon, one of the UK’s largest housebuilders. The dividend yield is expected to be almost 10% this year, so it should offer a real return for my portfolio. I also think Persimmon’s homes will be in high demand in the coming years due to the UK’s housing shortage. This should be a good tailwind for the company.
However, one risk to consider is the prospect of rising interest rates. The Bank of England has already raised the base rate twice since December, and this should mean mortgage rates also increase. It could dampen housing demand, and therefore impact Persimmon’s profitability.
Finally, I’d buy shares of M&G, the financial services firm that was once part of Prudential. The dividend yield forecast is again sky-high at over 9%. Management also aims to grow the dividend over time. M&G benefits from diversified earnings across its various savings and investment products. Indeed, its Assets Under Management and Administration (AUMA) stand at over £300bn, which shows clients trust the firm to invest wisely.
There’s always a risk of a stock market crash though. This would lower AUMA, and hence the fees M&G will earn. My dividend would likely reduce with the earnings too.
Final thoughts
A key risk with dividends is that they’re never guaranteed and depend on the profitability of the companies. As such, it’s important I diversify my portfolio with different types of businesses. So aside from the high dividend yields, these three companies operate across different sectors and should lower the risk of my dividends stopping completely.
Taking everything into account, I’d buy these FTSE 100 stocks for my portfolio due to the inflation-busting dividend yields and the diversification opportunity.
Dan Appleby owns shares of Rio Tinto. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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