When it comes to finding dividend shares, I think there are some great bargains in the FTSE 100. Interestingly, nine companies in the index currently offer dividend yields of more than 8%. However, chasing the highest yields on the market is not always the best strategy.
High yields can often indicate the market doubts current dividends are sustainable. High yields can also suggest that special dividends have been paid out, which may not be repeated.
With that in mind, here are my top FTSE 100 dividend shares, which yield more than 6%. I think the lower yield may indicate these distributions are more sustainable, although no dividend is ever entirely risk-free.
Top blue-chip dividend shares
The first company on my list is the defence group BAE Systems. At the time of writing, this stock offers a dividend yield of 6.4%.
I think this distribution is sustainable because BAE’s revenues are attached to multi-year contracts. This makes it easier for management to predict cash flows over the next few years. Therefore, the company should have more visibility about how much it can return to investors. That is why I would acquire the stock.
These factors reduce risk, but they do not eliminate it entirely. The company could face challenges such as contract cancellations and higher costs. These could destabilise cash flow forecasts.
Insurance group Aviva is another company on my list of FTSE 100 dividend shares to buy. With a dividend yield of 6.8%, at the time of writing, the stock is a blue-chip income champion.
Once again, this company benefits from a high level of revenue visibility. Life insurance and pension products are sold on multi-decade contacts, giving the group a good idea of how revenues will evolve going forward. This should reduce risks to the dividend. Those are the reasons why I would acquire the stock from my income portfolio
Challenges that could upset these delicate forecasts include competition and higher interest rates.
16.4% yield on offer
Mining group Rio Tinto is a bit of a high-risk play, in my opinion. The company is currently benefiting from a favourable iron ore price environment. As prices surge, the group has been achieving record profit margins. City analysts think this could translate into a double-digit dividend yield of 16.4% for next year.
I think it is unlikely this sort of dividend yield is repeatable. Nevertheless, I also think it is a desirable proposition. Rio has a history of returning excess cash from operations to investors, suggesting that while the double-digit dividend yield may not be around for long, investors may continue to see attractive returns. That is why I would buy the stock.
Of course, iron ore prices can fall just as fast as they rise. As such, there is always going to be a risk that Rio could have to cut the payout if prices crash.
Finally, I would buy Legal & General Group. This long-term savings provider exhibits similar qualities to Aviva outlined above. It is also exposed to the same risks such as competition and interest rates.
Still, I would buy the company for its 6.2% dividend yield today.
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Rupert Hargreaves 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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