I’m building a portfolio of high-yielding FTSE 100 dividend shares and with a new Stocks and Shares ISA allowance at my disposal, I’m ready to go shopping.

The good news is there are plenty of bargains out there. By which I mean top blue-chips trading at low valuations while offering ultra-high yields.

I love bagging cut-price stocks. By purchasing them while they’re cheap, as measured by the price-to-earnings ratio, I reduce the risk of overpaying. Also, there’s no speculative premium in the price, as can happen with shoot-the-lights-out growth stocks.

FTSE 100 bargain hunt

When a company’s share price falls, the yield rises. So bargain stocks can often combine with a super-high dividend income as well.

The danger is that the shares are cheap because they aren’t much cop. I could even fall into a value trap, where the stock never recovers, and the dividends slowly dry up as the company struggles to boost profits and generate cash.

I’m optimistic that the five stocks listed here won’t fall into that lethal trap but, as ever with investing, there are no guarantees. 

One of my favourite portfolio holdings is wealth manager M&G (LSE: MNG). The attraction’s obvious, as its shares yield a mighty 9.89%. That’s almost double the interest on a best buy easy access savings account.

Ultra-high yields can be vulnerable but when I bought the stock last year, I decided M&G was generating enough cash to sustain such a generous shareholder. Whether the board wants to is a different matter. It only increased the 2023 dividend per share by a wafer-thin 0.1p. I didn’t mind, given the income I was getting, but markets weren’t impressed.

Falling stock price

The M&G share price is down 0.55% over one year and has fallen 18.48% over three years. Yet the company boosted 2023 profits by a hefty 28%, with net client flows and operating capital generation also up smartly. That low dividend hike was the issue, I think.

I think M&G could enjoy an upwards re-rating when interest rates are finally cut, rival sources of income such as savings rates and bond yields fall, and the stock market kicks on. While I wait (and wait), I’m getting a storming level of income.

Let’s say I went flat out and loaded up on FTSE 100 high yielders. British American Tobacco, which I don’t hold, looks dirt cheap trading at 6.5 times earnings while yielding 9.7%. Legal & General Group, which I do hold, currently yields 8.15%.

HSBC Holdings is on my buy list with a cut-price valuation of 7.6 times earnings and yield of 6.96%. I recently bought luxury fashion house Burberry Group after its shares crashed 50% in a year. It now yields an impressive 5.94% and the shares trade at 13.9 times earnings, their cheapest valuation in years. I’m keen to buy more.

These stocks would give me an average yield of 8.13%. If I split my £20,000 Stocks and Shares ISA equally across all five, I’d generate dividend income of £1,626 in the first 12 months.

That looks pretty impressive to me. With luck, my stock picks will increase their dividends over time, and my income will rise. Over time, I’d hope to get a fair bit of share price growth as well.