The most well-liked methodology for selecting passive revenue shares is to match yields.

The desk beneath reveals the present high 10 yielders on the FTSE 100.

However which is one of the best? In different phrases, which is the one with the dividend that’s more than likely to be sustained?

Purchaser beware

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

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

Additionally, it’s necessary 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 sort of unattainable to foretell.

Trying again

As a result of dividends are by no means assured — and no person can see into the longer term — historical past is typically the one (if flawed) manner of creating how dependable they is perhaps.

Trying on the 5 monetary companies corporations within the high 10, M&G grew to become a standalone enterprise in 2019. For my part, that is too quick a interval to substantiate any sample.

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

Each Phoenix Group and Authorized & Normal are extra dependable. In the course of the previous 25 years, the latter solely minimize its dividend throughout the world monetary disaster.

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

Going up in smoke?

Tobacco corporations have a protracted monitor file 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 yr for 1 / 4 of a century.

Nonetheless, with growing 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 solution to go earlier than they generate the identical ranges of income and earnings as conventional tobacco merchandise.

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

Nonetheless, governments around the globe are inserting 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 lots of money. 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 finest dividend inventory within the high 10 however one which I wouldn’t need to purchase.

That’s as a result of I’m a long-term investor and — finally — I feel 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 below risk.