Shares in firms that pay out their earnings as dividends could be nice sources of passive earnings. And the FTSE 100 has some shares with dividend yields of 8% or extra. 

Compounding a £20,000 funding at 8% per yr generates a return of £3,198 per yr after 10 years. However traders must be cautious – there’s usually greater than meets the attention.

Excessive yields

Dividend yields are vital – investing £20,000 at 8% generates £1,000 per yr greater than investing it at 3%. And this may make an actual distinction when compounded over time.

After 30 years, a £20,000 funding compounded at 8% returns £14,900 per yr. The identical funding rising at 3% generates simply £1,400. 

The potential rewards supplied by shares with massive yields are excessive, however the dangers are sometimes excessive as properly. Vodafone is an effective instance. 

The inventory has a dividend yield of 10%, however that is about to be reduce in half. Typically, a excessive yield generally is a signal that traders doubt the shareholder funds will probably be sustainable.

British American Tobacco

On the face of it, British American Tobacco (LSE:BATS) is a superb illustration of this. The inventory comes with a ten% dividend yield, but it surely’s tobacco – how lengthy can that final?

Cigarette volumes are in decline and the scenario might be terminal. However tobacco firms have recognized about this for a while and have been making strikes to adapt. 

One instance is ZYN – the nicotine pouches produced by Philip Morris. Smoke-free merchandise now contribute over 35% of whole revenues and have been rising impressively.

British Tobacco has an analogous product – Velo – in its lineup. And if it could possibly obtain comparable success, the high-yielding dividend is likely to be extra sturdy than traders realise.

Authorized & Common

Authorized & Common (LSE:LGEN) shares additionally include a dividend yield over 8%. In contrast to tobacco, it’s not so apparent the life insurance coverage trade is in terminal decline.

The massive danger, although, is the enterprise has to price insurance policies that run for many years into the longer term. And that brings the potential for future losses of unspecified magnitude.

That’s the primary purpose shares in life insurance coverage firms usually include massive dividend yields. There’s all the time the danger of an sudden – detrimental – shock.

It’s price noting, although, that Authorized & Common does have a very good report of managing its operations and its dividend. And if it continues, traders may do very properly from the inventory.

Dangers and rewards

The FTSE 100 has a number of shares with excessive dividend yields. In a lot of circumstances, this displays the potential for shareholder returns being decrease sooner or later.

Typically, the inventory market will get issues mistaken, although. And if it’s underestimating British American Tobacco or Authorized & Common, there may very well be massive returns for traders.