All yielding over 6%, which of the FTSE 100’s prime 10 passive earnings shares is the perfect?

The most well-liked methodology for selecting passive earnings shares is to examine yields.

The desk beneath exhibits the present prime 10 yielders on the FTSE 100.

However which is the perfect? In different phrases, which is the one with the dividend that’s almost definitely to be sustained?

Purchaser beware

The very first thing to notice is that the checklist should be handled with warning.

The data is compiled based mostly on quantities paid throughout the previous 12 months. Nevertheless, we all know that Vodafone is planning to cut back its payout by 50% this 12 months.

Additionally, it’s vital to contemplate one-off occasions. In June, HSBC paid a particular dividend of $0.21 following the sale of its enterprise in Canada. That is unlikely to be repeated over the subsequent 12 months.

And an organization with risky earnings is more likely to have erratic dividend funds. Rio Tinto is uncovered to worldwide commodity costs, which means its return to shareholders is nearly inconceivable to foretell.

Trying again

As a result of dividends are by no means assured — and no one can see into the longer term — historical past is usually the one (if flawed) means of building how dependable they could be.

Trying on the 5 monetary providers firms within the prime 10, M&G turned a standalone enterprise in 2019. In my opinion, that is too brief a interval to verify any sample.

And because the desk beneath illustrates, over the previous 5 years, there’s been no clear pattern within the dividend funds made by Aviva and Schroders.

Each Phoenix Group and Authorized & Common are extra dependable. Throughout the previous 25 years, the latter solely reduce its dividend throughout the international monetary disaster.

Though I’d should do extra analysis earlier than shopping for both, at first look they seem like wonderful earnings shares.

Going up in smoke?

Tobacco firms have a protracted monitor document of paying substantial dividends. That’s as a result of their high-margin cheap-to-make merchandise are massively money generative.

Certainly, British American Tobacco (LSE:BAT) qualifies as a Dividend Aristocrat because it has elevated its payout ever 12 months for 1 / 4 of a century.

Nevertheless, with rising restrictions on the sale of cigarettes, each British American Tobacco and Imperial Manufacturers are diversifying into vapes and different non-combustible options.

However these have a protracted option to go earlier than they generate the identical ranges of income and earnings as conventional tobacco merchandise.

Throughout the six months to 30 June 2024, British American’s New Classes contributed 13.2% to income and a couple of.3% of working revenue. Within the six months ended 31 March 2024, Imperial Manufacturers’ Subsequent Technology Merchandise had been loss-making and accounted for 1.6% of turnover.

Nevertheless, governments around the globe are putting restrictions on these so-called ‘reduced risk’ merchandise. And they’re costlier to make which can scale back the extent of surplus money accessible for shareholders.

However for now, the sale of cigarettes generates masses of cash. In 2024, British American Tobacco expects to transform 90% of its adjusted working revenue into working money flows.

It’s ironic that, in my view, it’s the greatest dividend inventory within the prime 10 however one which I wouldn’t wish to purchase.

That’s as a result of I’m a long-term investor and — ultimately — I believe there’s going to be an inflection level the place the money generated from the sale of conventional cigarettes falls extra sharply than the rise coming from new merchandise. Its beneficiant and dependable dividend will then come underneath risk.