The FTSE 100 is home to many dividend shares. On average, shares in this large-cap index offer a dividend yield of 4%. That’s not too bad, but there are many that offer much more.
For instance, both Rio Tinto (LSE:RIO) and Persimmon (LSE:PSN) currently yield around 12%. They’re the highest-yielding companies in the Footsie.
On a £10,000 investment, that means I’d receive a passive income of £1,200. And If I buy them in a Stocks and Shares ISA, it would be tax-free too.
That sounds mighty high though. Should I buy these two shares today or are they too good to be true? Let’s take a look.
A FTSE 100 star
Persimmon is one of the UK’s leading housebuilders. I consider it to be one of the highest-quality shares in this industry.
There are several reasons for this. First, it owns high-quality land. It’s also disciplined to only buy more land at the right time in the cycle when prices appear to offer good value.
It’s run by experienced management with a strong track record.
Lastly, Persimmon has many of the financial metrics that I like to see in quality companies. That includes a return on capital employed of 25% and a profit margin of 27%. This suggests that it’s a profitable business that makes efficient use of its money.
Housing shortage
The future looks bright for this industry. There’s a structural shortage of housing in the UK. The Government has a target to build 300,000 new homes per year. But numbers have fallen short in recent years. It also suggests that Persimmon could be busy for years to come.
A word of warning, however. Housebuilders have benefited from rising house prices. And although annual price rises have been buoyant, there are signs that the process started to slow.
Also, the rising cost of living could put pressure on household finances, reducing potential housebuyers’ ability to earn and therefore borrow.
Overall, I’d consider buying these FTSE 100 shares today, but only in a long-term portfolio. There are near-term risks on the horizon, but the chunky dividend might provide some buffer against these.
Chunky dividends
Talking of chunky dividends, should I buy global miner Rio Tinto for its 12% dividend yield too?
Like housebuilders, mining shares also operate in a cyclical industry. A global recession could slow large-scale building projects such as skyscrapers and warehouses. These buildings use iron ore, which is Rio’s main product.
That said, more than half of sales come from China. And that’s one of the few countries with a supportive monetary policy right now.
Bags of cash
Like Persimmon, I’d consider Rio Tinto to be a high-quality business. With a market capitalisation of £75bn it’s a large, global company. It’s established and has considerable experience. I also like that it’s highly cash-generative and profitable.
Turning to its dividends, Rio has a consistent track record when it comes to returning cash to shareholders. And its juicy 12% dividend is well-covered by its earnings.
Overall, it’s an appealing large-cap share that I think deserves a spot in my long-term ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
