Yielding more than 8%, do these 4 dividend FTSE 100 stocks offer great value?

I like to use the income from dividend stocks to buy more stocks. I can then take advantage of integration, which was once described as the greatest invention of mankind.

But it is always wise to investigate a share that offers generous levels of income.

Basic math

That's because a stock's yield is a function of its earnings and share price. And if one of these two elements moves significantly, it can have a big impact.

A drop in share price may be a sign of an underlying problem. If this proves to be the case, there is a good chance that the payment will eventually be terminated.

In a recent report, AJ Bell gave”rule of thumb” to determine if the dividend is sustainable. It suggested that if the return exceeds the 10-year yield (3.77% on 18 September) by a factor of two, the offer may seem too good to be true.

Using this method, any share that yields more than 7.5% could be something of a value trap.

The best six

According to my calculations, there are currently four shares in the FTSE 100 which offers a higher return than this. Encouragingly, none of the yields seem to be distorted by the share price decline.

But that doesn't mean payments are guaranteed. For example, during the last three financial years, Phoenix Group Holdingsretirement and savings specialist, has written an after-tax loss. This is a warning sign that its dividend may be cut.

Another red flag is that the company returns almost all of its profits to shareholders.

In order to continue to grow, many businesses need to reinvest some of their profits into product development or replacement of fixed assets. So the payout ratio is a good measure of affordability.

IM&G (93%) and Legal & General (94%), also working in the financial services sector, has the highest rates.

In the absence of other information, history sometimes gives us clues as to what sustainable returns might look like.

IM&G is divided Prudential in 2019. Although it does not have a long history as a private company, it has increased its dividends every year since becoming a listed company.

Due to the global financial crisis, Legal & General reduced its fees in 2008 and 2009. And it ended up unchanged in 2020.

Classy

But the most impressive of my four British American cigars (LSE:BATS). It has never cut its dividends. In fact, it has been increased every year since 1998. This means it is one of the very few Dividend Aristocrats.

And with a payout ratio of 76%, it seems to be the safest of the four. It is able to pay an open dividend because it is traditionally a low-tech, high-quality product.

But times are now changing and the company has to switch to manufacturing so-called 'reduced-risk' products. This is very expensive to produce. During the six months to 30 June, the smoke-free range contributed 17.6% of revenue but only 2.3% of operating profit.

Despite its provenance as an excellent dividend stock, I don't want to invest. Its new products are increasingly limited and it will have to find more money – historically used to pay dividends – to develop them. Money will also be needed to innovate.

For this reason, I fear that its current yield of 8.1% is not sustainable.