As the returns on cash dwindle into nothingness, the income stream produced by some top FTSE 100 stocks looks more enticing than ever.A select fewnow yieldmore than 7% a year, over 700 times the return on NatWestsnotorious cash ISA, which pays just 0.01%.
But a high yield is also a classic danger sign, as it often follows a sharply falling share price. Dividends arent guaranteed, and if the company doesnt generate thecash to cover it, they can be culled overnight. So are these two7% yields too good to be true?
Royal Dutch Shell
Anglo-Dutch oil giant Royal Dutch Shell (LSE: RDSB) now yields 7.6%, the third highest on the FTSE 100, and now makes up 1 in every 7.50 paid out. Last year, it handedinvestorsa whopping 9.37bn, although that was lower than the 10.72bn paid out in 2009 .
Famously, Shell hasntcut its dividend since the Second World War, but unless the oil price shows a meaningful recovery, that proud record will have to be sacrificed. Dividend cover is now a wafer thin0.2, suggesting that future payouts will have to befunded from debt. The BG acquisition has already forced gearing up to28.1%, more than double12.7% one year ago.However, management continues to hold the line, maintainingtheinterim dividend steady at 47 cents at the end of July, despite a 72% drop in Q2 underlying earnings to $1bn. It recentlyreported earnings-per-share (EPS) of just $0.29, and that gap needs to be bridged somehow.
Shell has been cutting costs alongside every other oil major but this wont be enough to fund the dividend on its own unlessthe oil price meaningfully recovers. Talk of an OPEC price freeze and slip in US inventories sparkeda mini-recovery last week, but now crudehas slipped to around $46 again. Shell generated just $4.8bn free cash from operating activities in Q2, while the dividend cost the group $4.5bn, with annual forecast capex of around$14.5bn. These sums look precarious and another year of low oil prices mayfinally sink the dividend.
BerkeleyGroup Holdings
Along with its fellowUK housebuilders,BerkeleyGroup Holdings (LSE: BGK) suffereda big hit after Brexit. It traded at 3,285pjustbefore the voteand despite recovering from the post-referendum crash it remains20%below that at 2,606p. This has helped drivethe yield to a super-sized 7.4%.
The recent share price collapse is starting to like a great buying opportunity, withthe group anticipating 2bn of pre-tax profit to 30 April 2018, based onsolid forward sales. The dividend also looks relatively secure, with Berkeley looking to pay out 10 per share evenly over the next five years. EPS are forecast to rise 44% in the year to April 2017, with revenues rising strongly to 2.68bn.
Also, the housing market generally has held firm after Brexit, with surveys repeatedly showing only a slight dip in prices and transaction numbers, which can easily be blamed onthe seasonal summer lull.
These are early days and wewill have a clearer view when the Government triggers Article 50, possibly next spring. But trading at 9.55 times earnings and yielding such a juicy income stream, and with housing demand strong in an undersupplied market, the future remains bright.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings and Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
