Anybody who loves top dividend stocks will struggle to resist going on a buying spree at the moment. The FTSE 100 is packed full of them.

Some of the yields on offer are astonishing. Housebuilder Persimmon currently yields 17.9%. That’s the best on the FTSE 100 but mining giant Rio Tinto isn’t that far behind, with a yield of 12.87%.

Fund manager Abrdn yields 9.37%, insurer Phoenix Group Holdings yields 9.07%, and builder Taylor Wimpey yields 9.05%. Wow.

I’m buying dividend stocks today

There are plenty more where those came from. In fact, I can hardly remember a time when yields were so high. But can I trust them?

A yield is calculated by dividing a company’s dividend by its share price. So if the dividend is 5p and the share trades at £1, the yield is 5%. This means that if the share price halves, say, to 50p, the yield doubles to 10%. 

As this basic example shows, a high yield is often the sign of a company in trouble. It signals both an opportunity, and a threat.

If stock markets are down generally and my chosen dividend stock has got caught up in the wider malaise, then I’ll see that as an opportunity. Loads of stocks fits the bill right now, thanks to this year’s global political and economic turmoil. 

But I would also work through its reports, statements, and updates, to see whether there are problems specific to that company. In particular, I would look to see whether management can afford to continue paying its dividend. The easiest way of doing this is to check dividend cover. This is calculated by dividing shareholder payouts by company earnings, but it can also be found easily online. 

Ideally, it will be covered twice or more. This figure is often lower with utilities, where earnings are typically more reliable, allowing companies to hand more of them to shareholders. A healthy level of cover is no guarantee, but it’s a promising sign that the company will be able to continue paying me passive income in future.

I would also look at other company numbers, such as the size of its net debt and of course the reliability of its free cash flows, which fund shareholder payouts. Similarly, I would prioritise firms with a lengthy track record of making dividend payments. Especially those who maintained them through thick and thin (and the pandemic, too). 

FTSE 100 offers amazing yields

Any company that increases its dividends year after year would be high on my list, as this gives me a rising passive income. While past performance is no guide to the future, it does offer reassurance.

As a general rule, I would prefer a company with a lower dividend that looks more reliable, than a higher dividend that is likely to be cut. When a dividend is cut for being unaffordable, the company’s share price tends to bleed, too.

Naturally, a host of other factors will determine whether the dividend is sustainable. A strong balance sheet, loyal customer base, unique brand, or popular products can all help secure those all-important cash flows. 

While I’m thrilled by all the top FTSE 100 dividend stocks out there right now, I’m doing some careful sums before buying them.

The post Can we really trust today’s high-yielding dividend stocks? appeared first on The Twelfth Magpie.

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Harvey Jones holds shares in Persimmon. 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.

Several years ago I decided I would rather invest in FTSE 100 dividend shares than a buy-to-let property. Subsequent events have confirmed I did the right thing.

The Government has been taxing buy-to-let investors for years, in a bid to level the playing field with first-time buyers. This has destroyed the investment case for becoming an amateur landlord, while doing little to help young buyers.

These dividend shares offer superior yields

Investors now get all of the bother of buy-to-let, but few of the financial benefits. By investing in dividend shares instead, I expect to avoid all the trouble involved in maintaining the property, finding tenants and possibly evicting them if they can’t afford to pay their rent as the cost-of-living crisis bites. That’s the last thing I want on my conscience.

Investing in shares has its risks, but it is much less stressful than trading physical bricks and mortar. I can buy and sell in seconds, and take all my returns free of income tax and capital growth, inside my Stocks & Shares ISA allowance.

I can still tap into property market performance by investing in the shares of top UK housebuilders. The income is better too. While buy-to-let yields of 5% or 6% are typical, FTSE 100 listed Persimmon (LSE: PSN) currently yields 16.5% a year.

That is a ridiculously high dividend income, and I cannot imagine it is sustainable. Especially with cover now slim at 1.1%. The yield has been driven up the falling Persimmon share price, which is down by a third in three months, and 50% in a year.

One reason is that pre-tax profit for the six months to June 30 fell 8.3%, from £480m to £439.7m, while housing completions fell, too. The property market is clearly not going to escape today’s inflationary storm unscathed, and neither will Persimmon.

Buy-to-let is too much bother for me

Yet this is hardly a company in trouble, as sales prices are still rising slightly and demand is “strong”. Also, I also think much of the problems have been priced in. Persimmon trades at just 6.1 times forward earnings, so I am far from overpaying. I would buy this stock over a physical property for sure.

The same applies to fellow FTSE 100 housebuilder Barratt Developments (LSE: BDEV). Its share price has also taken a hit, down 17% over three months and 44% over a year. Yet in July, management said annual profits were on track to beat forecasts of £1.048bn, as sales return to pre-pandemic levels and average selling prices climb £11,200 to £300,000.

Chief executive David Thomas said rising completions and strong forward sales give Barratt the “resilience and flexibility” to defy the economic uncertainties ahead. The dividend yield is lower at 7.1% but cover is strong at 2.2. That’s a forward valuation of 5.2 times earnings, which makes it looks good value as well.

Buying these two dividend shares looks like a much more straightforward way to generate the income I need for retirement than becoming a buy-to-let landlord.

The post Forget buy-to-let. I’d rather buy these 2 high-yield FTSE 100 dividend shares  appeared first on The Twelfth Magpie.

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Harvey Jones doesn't hold any of the shares mentioned in this article. 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.

Inflation is ravaging cash in the bank, but I’d buy top FTSE 100 dividend stocks in a bid to stay one step ahead. The following two offer incredible double-digit yields. Both tempt me today but are there underlying problems I haven’t spotted?

Housebuilder Persimmon (LSE: PSN) is one of the most eye-catching FTSE 100 dividend stocks of all, currently yielding a staggering 11.17%. Its share price performance is rather less dazzling, though. The stock is down 30% over 12 months.

The housing sector is often seen as a play on consumer confidence, and war in Ukraine, the rising cost of living, and anticipated interest rate hikes have undermined the Persimmon share price. The cladding crisis has also hit performance. Persimmon even sought legal advice over government threats to stop housebuilders from trading if they don’t pay into a supposedly voluntary fire safety repair fund.

Persimmon is one of my fave FTSE 100 dividend stocks

Along with 36 other construction firms, it has now signed up to the £3bn Building Safety Levy, designed to fix problem blocks. Yesterday’s results showed demand remaining “strong”, with average sales rates up 2% year on year. It also boasts a “robust” £2.8bn forward order book. That’s why I still see Persimmon as one of the most tempting FTSE 100 dividend stocks today.

The Bank of England is likely to hike interest rates further but I’m not too worried about that. Mortgage rates are still historically low, lenders are hungry to lend, and buyer demand is high. Housing shortages are unlikely to ease soon. Prices are still rising. Persimmon doesn’t look overpriced to me, trading at 8.8 times earnings.

Dividend cover is thin compared to many FTSE 100 dividend stocks at just 1.1, but management is still committed to rewarding shareholders. It has just handed them an additional distribution of 110p per share, on top of the standard Q1 dividend. Next year’s forecast yield is around 11%. Margins look comfortable at 27.1%. The same is true of return on capital employed at 27.4%. I’d buy and hold for long-term dividend satisfaction. Maybe some share price growth, too.

Low share prices can boost yields

Anglo-Australian mining giant Rio Tinto (LSE: RIO) also tops most FTSE 100 dividend stocks by paying a thumping 11.7% yield. Dividend cover is more comforting here, at 1.7. The forecast yield is even higher, at 12.4%.

Again, a key reason is that the Rio Tinto share price has struggled lately. It is down around 12% measured over the last year. That is partly down to last week’s double-digit drop, as investors were spooked by lower-than-expected iron ore shipments in Q1. Management added to their fears by warning of inflationary risk, the impact of Chinese Covid lockdowns, and of course the threat of a lengthy war in Ukraine.

Labour shortages and supply chain issues are also causing problems, but I don’t choose FTSE 100 dividend stocks based on how well they are doing in the most recent quarter. I buy them for their long-term prospects over at least a decade or more. In fact, I think the recent dip is working in my favour, by making the stock cheaper. It currently trades at just 6.3 times forecast earnings. With operating margins of 48.9% on a return on capital employed of 35.9%, I’m a buyer.

The post With inflation at 7%, I’d buy these 2 FTSE 100 dividend stocks yielding 11% appeared first on The Twelfth Magpie.

More reading

• Down 63% and yielding 6.3%! Is this FTSE 100 share a brilliant bargain?
• This 5.5%-yielding income stock’s at a 13-year low and cheap to-boot! Time to consider buying?
• Down 65% but yielding 6%! Is this FTSE 100 dividend stock an unmissable bargain?
• A 6.7% forecast yield and 53% below ‘fair value’! 1 stunning FTSE income stock for investors to consider today?
• How much do you need in an ISA to target a £2,066 monthly passive income in 2066

Harvey Jones doesn't hold any of the shares mentioned in this article. 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.