FTSE 100 dividend forecasts are holding flat but are still at an attractive level, albeit shy of 2018’s all-time high. When share buybacks are taken into consideration as well, the income opportunity offered by UK equities looks compelling.
The biggest 100 companies in the UK are expected to pay out £78.6bn in 2024 and £83.9bn in 2025, according to AJ Bell’s quarterly dividend monitor. While these estimates haven’t increased since last quarter, they are strong from a historic point of view. The all-time record is £85.2 billion.
The overall cash yield on UK equities has also been boosted by share buybacks and special dividends. We have seen an increase in buyback activity in the UK market in recent years as firms look to capitalise on the valuation discount in their stock. The value of buybacks announced so far in 2024 has hit £49.9bn.
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Buybacks can be good news for investors, as they usually offer shareholders the opportunity to sell their stock at a premium price. They can also help push the share price up for those who decide to hold on to their investment.
Russ Mould, investment director at AJ Bell, says: “Such bumper returns supplement dividend payments. Add together ordinary dividends, special dividends and buybacks and FTSE 100 firms are expected by analysts to return £131.5 billion to their shareholders in 2024 and £85.7 billion in 2025. The all-time high figure was £137.5 billion in 2022.”
Equity yields versus bonds
The Bank of England cut the UK base rate on 1 August for the first time in over four years, bringing it down from a 16-year high of 5.25%. Despite this, rates are still high and will remain elevated for some time yet.
Similarly, bond yields have fallen slightly from their peak but remain well above their long-term average. For years after the global financial crisis, there was little income to be found in fixed income investments, but that is no longer the case.
With government bonds still offering decent yields, income-focused investors may ask why they should take on the additional investment risk associated with equities in search of dividend payments.
This question becomes more pressing when you consider the fact that the FTSE 100 has moved sideways for the past five months. It delivered strong growth in the first half of the year, hitting an all-time high in May, but has stalled since.
Despite this, Mould says the overall cash return from UK equities looks favourable compared to bonds. If you broaden things out to look at the FTSE 350, the UK has an overall cash yield of 7.7% (includes dividends, buybacks and takeovers).
“That figure compares favourably to the 5.00% Bank of England base rate, the 3.92% yield on a 10-year UK government gilt and the 2.2% headline rate of inflation,” he adds.
Top 10 dividend yields in the FTSE 100
The top 10 yielding companies in the FTSE 100 include a mix of investment and financial services companies, banks, miners and tobacco companies. This is fairly typical – investors often turn to these sectors for the attractive dividends on offer.
However, it is important that the figures in the below table are understood in context.
A high dividend yield is often a good thing, suggesting cash is being returned to investors. But it can also just be a sign of a falling share price (as dividend yield is calculated by dividing the total annual dividends by the share price).
It is also important to look at a company’s dividend cover and payout ratio to understand whether any cash returns are sustainable.
Dividend cover shows you how many times a company could afford to pay dividends to shareholders based on its income. Meanwhile, payout ratio shows you how much of the company’s earnings would be spent on meeting any dividend payments.
A payout ratio over 100% suggests a company could be paying more in dividends than it can afford based on its earnings.
| Company | Dividend yield (%) | Dividend cover (x) | Payout ratio (%) | Cut in last decade? |
|---|---|---|---|---|
| M&G | 9.5% | 1.36x | 75% | No |
| Legal and General | 9.5% | 0.87x | 115% | No |
| Phoenix Group | 9.4% | 0.05x | 2,123% | 2016, 2018 |
| British American Tobacco | 8.0% | 1.35x | 74% | 2015 |
| Rio Tinto | 7.4% | 1.71x | 58% | No |
| Aviva | 7.3% | 1.21x | 83% | 2016, 2022, 2023 |
| HSBC | 7.2% | 2.08x | 48% | 2019 |
| Imperial Brands | 6.8% | 1.62x | 62% | 2019, 2020 |
| Schroders | 6.3% | 1.21x | 83% | 2020 |
| Land Securities | 6.1% | 1.17x | 85% | No |
Source: AJ Bell Q3 Dividend Dashboard, company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream. Ordinary dividends only.
Dividend cover within the FTSE 100 is expected to fall to its lowest level since the pandemic this year, according to AJ Bell, but remains solid compared to its longer-term history.
“Dividend cover is much better than it was ahead of the mid-cycle growth bump of 2015-2016 that promoted a rash of dividend cuts and, for that matter, the entire stretch from 2014 to 2020 when earnings never once covered payouts by a factor of two or more,” Mould says.
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