The FTSE 100 index is stuffed full of high-quality income stocks. Some companies offer yields of more than 5%, which look particularly attractive in the current interest rate environment.
However, I think some of these companies are paying out more than they can afford, which is why I wouldn’t buy all of them.
But I think most are sustainable, and I wouldn’t hesitate to add these businesses to my portfolio.
FTSE 100 shares with high yields
The first company on my list is British American Tobacco. I’ve highlighted this business first because I realise it may not be suitable for all investors. Nevertheless, with a dividend yield of 8%, at the time of writing, I don’t think it can be excluded from a list of the best income stocks in the blue-chip index.
While there’s a significant risk that tobacco consumption may decline substantially in the near future, jeopardising the group’s payout, at this point, the distribution is well covered by earnings per share and cash generation. That’s. why I’d buy the stock for my income portfolio.
Moving away from tobacco and in the financial sector, I like the look of Legal & General and Phoenix Group. These FTSE 100 companies offer dividend yields of 6.5% and 7.1% respectively.
I like both of these businesses because they’re in the business of pension management. Managing pensions requires a long-term mentality. That suggests to me the managers of both companies won’t take excessive risks. I think the dividends from both business are more sustainable than other stocks in the blue-chip index.
That said, financial companies can be complex to understand. There can be hidden risks on the balance sheet. Due to the way pension liabilities are worked out, a slight change in interest rates could have a significant impact on their balance sheets.
But I’m comfortable with these risks, which is why I’d buy both stocks. Other investors may not be so happy.
As a defensive income investment, I’d acquire SSE for my portfolio of FTSE 100 shares. At the time of writing, the stock offers a dividend yield of 5.1%. I think this payout is sustainable at present.
However, I’m well aware that regulators are clamping down on the sector’s profitability. This could impact growth and cash generation. Still, SSE is investing heavily in renewable energy, and that’s what excites me.
The final stock I’d buy for my portfolio of FTSE 100 income shares is the homebuilder Persimmon. The company’s cash return plans suggest its shares could yield more than 8% over the next 12 months. This is more than double the index’s average.
With home prices continuing to rise and demand for properties only growing, I think the company will remain a cash cow.
That said, a sudden increase in interest rates could slow demand for new properties. Rising prices may also hurt the group’s profit margins, reducing the amount of cash for distribution to investors.
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Rupert Hargreaves owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.