All yielding over 6%, which of the FTSE 100’s top 10 passive income stocks is the best?

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

The desk beneath exhibits the present prime 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 most definitely to be sustained?

Purchaser beware

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

The data is compiled based mostly on quantities paid in the course of the previous 12 months. Nevertheless, 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 following 12 months.

And an organization with unstable earnings is prone to have erratic dividend funds. Rio Tinto is uncovered to worldwide commodity costs, that means its return to shareholders is sort of unimaginable to foretell.

Trying again

As a result of dividends are by no means assured — and no one can see into the long run — historical past is typically the one (if flawed) approach of creating how dependable they could be.

Trying on the 5 monetary companies corporations within the prime 10, M&G grew to become a standalone enterprise in 2019. In my opinion, that is too quick a interval to verify any sample.

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

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

Though I’d need to do extra analysis earlier than shopping for both, at first look they seem like wonderful earnings shares.

Going up in smoke?

Tobacco corporations have an extended observe file of paying substantial dividends. That’s as a result of their high-margin cheap-to-make merchandise are vastly 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.

Nevertheless, with growing restrictions on the sale of cigarettes, each British American Tobacco and Imperial Manufacturers are diversifying into vapes and different non-combustible alternate options.

However these have an extended technique to go earlier than they generate the identical ranges of income and earnings as conventional tobacco merchandise.

Through the six months to 30 June 2024, British American’s New Classes contributed 13.2% to income and a couple 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.

Nevertheless, governments all over the world are inserting restrictions on these so-called ‘lowered danger’ merchandise. And they’re costlier to make which can cut back the extent of surplus money accessible for shareholders.

However for now, the sale of cigarettes generates masses of cash. 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 prime 10 however one which I wouldn’t wish to purchase.

That’s as a result of I’m a long-term investor and — ultimately — I believe 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 underneath menace.