Top 3 FTSE 100 dividend shares to watch

September 3, 2021 0 Comments

Investors need to diligently track the FTSE 100 dividend shares. At least, that’s what I think since some of these companies are offering enormous dividend yields at the moment. High Dividend Yield stocks are my favourite kind of investment because they can generate fairly substantial passive income. Just 10 FTSE 100 index companies are responsible for 87% of the increase in dividends so far this year. 

So with that in mind, here are my top three highest yielding FTSE 100 dividend shares.

Highest yielding FTSE 100 dividend shares

Company NameExpected Dividend Yield (%)Expected Dividend CoverExpected Payout Ratio (%)
Rio Tinto12%1.31x77%
BHP Group9.2%1.18x85%
Imperial Brands8.7%1.67x60%
Admiral Group7.6%0.81x123%
Source: AJ Bell Dividend Dashboard

The mining industry is booming due to a marked increase in commodity prices and escalated demand for iron ore. Improved profits have ultimately led to several companies within this sector yielding the highest dividends across the entire UK market. So, it shouldn’t be surprising that two of the companies I’m looking at today belong to the mining industry. 

At the top of the list is Rio Tinto (LSE:RIO). The world’s top iron ore producer that’s currently yielding 12%! As previously mentioned, 2021 has been a great year for iron ore prices. With demand surging as China reboots its economy and supply chains in Brazil being disrupted, the metal has seen its value skyrocket. And consequently so has Rio Tinto’s profits.

The second highest-yielding dividend stock in the FTSE 100 index is BHP Group (LSE:BHP). Like Rio Tinto, BHP is another key global supplier of raw materials like iron ore – the core component in making steel. The company has strong cash generation and a relatively low debt position. As a result, the management team can offer a yield of 9.2% at today’s share price.

But both these businesses suffer from the same weakness – their dependence on iron ore prices. New suppliers are emerging from Australia and Brazil may result in the supply eventually outweighing the demand. If this were to happen, iron prices would naturally decline, taking BHP’s and Rio Tinto’s profits and dividends with it.

Another industry, another opportunity

My third highest-yielding FTSE 100 dividend share is Imperial Brands (LSE:IMB).  This business is one of the world’s largest tobacco producers. It has begun diversifying its product portfolio into next-generation products (NGP) such as vapourisation devices. Given the addictive nature of the firm’s products, Imperial Brands is generating sufficient cash flow to afford an 8.7% dividend yield this year. And with various improvements being made in its logistics infrastructure and narrowing losses from its NGP, it doesn’t look like a cut is coming anytime soon.

Of course, Imperial Brands is no stranger to regulatory risks. It’s no secret that tobacco products like cigarettes aren’t exactly healthy. Suppose regulators decide to apply more restrictions regarding nicotine levels. In that case, the firm’s profits could be adversely impacted, potentially jeopardising the dividend payout.

Future Outlook

The total dividend payment from the FTSE 100 dividend shares is expected to reach £76.9bn ($106.3m) in 2021. That is about 25% higher than a year ago and clearly reflects the post-pandemic rebound for these businesses.

High yields alone are not enough to determine whether therein lies a good long-term investment. And they can be a sign of trouble ahead. But in the case of these four businesses, the prospects look promising. So I’m adding them to my watchlist today.

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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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