There are plenty of FTSE 100 stocks around today that offer great dividend yields. There are at least three stocks with double-digit dividend yields, and at least a handful of others with yields ranging between 5% and 10%. But there is a catch to almost all these stocks.
Are high dividend yields enough?
Some of them are in cyclical sectors, which means their fortunes can fluctuate significantly depending on where we are in the business cycle. These include miners, property stocks, and financial services companies. This makes me question their dividend continuity.
The ones that are in safer, defensive sectors, which see much more predictable demand, face diminished prospects. Examples of these are tobacco stocks, which are facing struggling to pivot towards healthier options.
One FTSE 100 stock I like
So how do I ensure long-term dividends for my FTSE 100 investments?
Before saying anything else, let me just say that all stock market investments are subject to risk. However, we can buy stocks that minimise these risks, and potentially have a healthy upside as well.
One such stock I like is the energy producer National Grid (LSE: NG). As a utility, its performance is far more predictable than that of cyclical stocks. So, even though its 5% dividend yield is middling, its dependability appeals. In the last decade, the company has paid dividends every single year.
And its yield has never fallen below 3.5% in this time. This level is important because it is the average FTSE 100 yield right now. This means that based on the past trends, my investments will likely yield at least average dividend yields, if not more.
Strong results for National Grid
There is more to like about the stock. It just released strong results. These can impact both its share price and dividend levels positively in the future. Its reported pre-tax profits grew by a huge 86% for the six months ending 30 September from the same time a year ago.
Alarmingly, its reported earnings per share (EPS) declined by 25%. However, it explains this is because of changes to tax calculations. That its EPS is in fact healthy otherwise, is evident from underlying numbers, which exclude the impact of these changes. As per this calculation, the company’s EPS has grown by 66%.
It has also recently upped its forecasts. In now expects to deliver “full year underlying EPS significantly above the top end of our 5 – 7% range”. This is because the North Sea Link, a submarine power cable between Norway and the UK has just become operational. It is expected to add £100m to its operating profits.
What I’d do
I am optimistic about future trends for the stock based on this. The only downer is that National Grid’s price-to-earnings (P/E) ratio is already 25 times. This makes it pricier than the average FTSE 100 stock, with a P/E of around 20 times. I do think that its share price could still rise more, going by the fact that its earnings are set to rise. Besides that, its absolute price is also moderate. I would buy the stock and hold it for a long time.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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