£500 buys 125 shares in this 9.9%-yielding FTSE 100 stock!

The FTSE 100 broke past the 9,000 mark in July for the first time ever, but not every stock joined in the rally. A handful of big names are still languishing near their lows, with plunging share prices sending dividend yields to eye-watering heights.

Dividend yield is a simple calculation — it’s the annual dividend divided by the current share price. As prices fall, the yield rises, which can provide enticing opportunities for income investors to lock in high returns. But high yields often signal high risk, and dividend payments can be cut if profits don’t recover.

One battered blue-chip stock now offering an unusually high yield is British advertising giant WPP (LSE: WPP). With the share price hovering around £4, a £500 investment buys roughly 125 shares. At the current dividend of 39.4p per share, that equates to annual passive income of just under £50 — a tidy 9.9% yield.

Is it easy money – or a dividend trap?

WPP’s taken a battering this year, with shares down nearly 50% amid growing investor concern. The advertising industry is in flux, and the rise of artificial intelligence (AI) has disrupted traditional agency models. Many clients are reallocating budgets to AI tools and in-house digital solutions, squeezing legacy revenue streams.

In response, WPP’s brought in former Microsoft executive Cindy Rose to lead a strategic turnaround. Analysts at UBS say short-term pain is still likely, but Rose’s tech background could be well-suited to repositioning WPP for the digital age.

On the income front, WPP’s still performing well, with £14.74bn in revenue and earnings of £542m. It slashed its dividend in 2019 from 60p to 22.7p but has since steadily raised it to 39.4p. The company previously had almost two decades of uninterrupted dividend growth, which may give long-term investors some optimism.

A challenging road ahead

WPP still faces several risks and a full recovery may take some time. The company currently holds around £6.35bn in debt, nearly twice its equity base — a red flag in times of falling earnings. If the firm can’t find a way to compete with AI, it may struggle to achieve a meaningful recovery.

For now, profitability remains respectable, with a return on equity (ROE) of 15.8% and an operating margin of 13.1%. A turnaround will depend on how well the new leadership executes its recovery strategy. Further declines or a dividend cut remain possible if profitability fails to improve.

Valuation-wise, the stock now trades on a forward price-to-earnings (P/E) ratio of just 5.78, suggesting the market may be pricing in a recovery already — or at least an end to the losses.

My verdict

There’s no guarantee WPP will recover quickly, or that the dividend will be maintained at current levels. But with a strong brand, competent new leadership and an ultra-low valuation, there’s reason to be cautiously optimistic.

For investors seeking high passive income and willing to stomach some volatility, I believe WPP’s worth considering as part of a diversified income portfolio — particularly at the current low price.

The post £500 buys 125 shares in this 9.9%-yielding FTSE 100 stock! appeared first on The Motley Fool UK.

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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Microsoft. 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.