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3 dividend shares paying bumper cash yields!

Young brown woman delighted with what she sees on her screen

After 35 years of buying shares, my investment strategy is fairly well-honed. I’m an old-school value investor, so I buy companies whose share prices I think are trading below fair value. Also, I’m drawn to buy dividend shares — stocks that make regular cash payments to shareholders — for their passive income.

One problem with dividend shares

Ideally, I like to buy ‘cheap’ shares in solid companies trading on low price-to-earnings ratios and correspondingly high earnings yields. In addition, I hunt down dividend shares that offer market-beating cash yields to patient shareholders. Alas, the problem with being a value/income investor is that not all shares pay dividends.

Indeed, the majority of stocks listed in London don’t pay regular cash dividends. Also, future dividends are not guaranteed, so they can be cut or cancelled anytime. For example, many UK-listed businesses slashed or deferred their dividends during 2020’s Covid-19 crisis. However, many then restored these payouts as the world returned to normal.

FTSE 100 dividend shares

The good news for me is that almost all companies in the UK’s blue-chip FTSE 100 index do pay out dividends. Right now, the Footsie offers a dividend yield of around 3.8% a year. Then again, many Footsie members offer far higher cash yields, such as these three ‘dividend dynamos’:

Company Persimmon Rio Tinto M&G
Business Housebuilding Mining Asset manager
Share price 1,315p 5,364p 192.8p
52-week high 2,930p 6,343p 230p
52-week low 1,113.5p 4,424.5p 159.3p
12-month change -53.8% 14.9% -3.1%
Market value £4.2bn £88.58bn £4.5bn
Price-to-earnings ratio 5.7 6.0
Earnings yield 17.5% 16.7%
Dividend yield 17.9% 9.9% 9.5%
Dividend cover 1.0 1.7

Three dividend dynamos

My table shows that shares in housebuilder Persimmon have crashed by more than half over 12 months. This has driven up its dividend yield to almost 18% a year — surely an unsustainable level? Furthermore, this dividend is not covered by trailing earnings, a sign to me that this payment is sure to be slashed in 2023. However, my wife owns Persimmon shares and plans to hold onto them for their long-term recovery potential.

We also own shares in Anglo-Australian mega-miner Rio Tinto, which currently offers a near-double-digit dividend yield. But this cash payout is covered 1.7 times by trailing earnings — a much higher margin of safety than that for Persimmon. That said, Rio Tinto’s 2023 earnings might be hit by falling metals prices or waning Chinese demand. Also, it last cut its dividend in 2016, so it has prior form in this field.

Finally, shares in asset manager M&G also offer a market-beating dividend yield of 9.5% a year. However, this is not covered at all by current earnings (though M&G’s profits are expected to rebound in 2023). On the other hand, the group’s future is closely tied to the performance of global asset prices, which may weaken again next year. So M&G’s dividend is by no means guaranteed looking ahead.

I like Rio best

Summing up, I’m expecting a UK economic recession next year, which will hit company earnings and may place some dividends under threat. But of the three dividend shares above, I favour Rio Tinto for its massive cash flow, earnings, share buybacks, and ongoing cash returns. And that’s why we’ll hold onto our Rio Tinto shares for dear life!

The post 3 dividend shares paying bumper cash yields! appeared first on The Motley Fool UK.

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Cliff D’Arcy has an economic interest in Persimmon and Rio Tinto shares. 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.