Housebuilders Persimmon and Taylor Wimpey are the two highest yielding stocks on the FTSE 100, according to the latest AJ Bell Dividend Dashboard, paying out 10.5 and 10.1 per cent respectively.
The quarterly report showed the financials sector is also well represented in the top 10, with Standard Life Aberdeen, Aviva and Direct Line yielding 8.8, 8 and 7.9 per cent respectively.
Highest-yielding FTSE 100 stocks
However, with the yield dependent upon the share price as much as the dividend paid per share, AJ Bell’s investment director Russ Mould warned against blindly chasing the highest payers without doing your homework first.
“The presence of two housebuilders in the top-10 is testimony to the size of their capital return programmes, but it may also hint at investor scepticism that the industry can maintain its current lofty levels of profitability without the benefit of government assistance via the Help to Buy and Lifetime ISA schemes,” he explained.
“That said, Help to Buy has been extended again so it is possible that these payments are well underpinned, if unwittingly, by the taxpayer.”
Of greater concern to Mould are Standard Life Aberdeen, Vodafone and Centrica, where analysts remain concerned over the prospects of a dividend cut even though all three firms’ management teams claim to be doing their utmost to avoid such an eventuality.
“Vodafone boss Nick Read has already declared that the telecom giant’s annual dividend will be unchanged at €0.1507 a share for 2018, while Standard Life Aberdeen’s Keith Skeoch has said the dividend will come in flat at 21.6p in 2019 as the firm continues to work on getting the best out of the 2017 merger,” he continued.
“Centrica’s Iain Conn also continues to target an unchanged payment for 2019, following the cuts of 2014 and 2015.”
The dividend cover on the three stocks stands at 1x or below. A figure of less than 1x should be taken as a warning to shareholders as it means the company is paying out more than it makes in that year. This means it has to dip into cash reserves, sell assets or borrow money to maintain the payment, which are unlikely to be sustainable over the long term.
The stock with the highest level of dividend cover on this list is Aviva, at 1.84x. It is yielding 8 per cent.
Income-focused stockpickers may be better off looking at the prospects for dividend growth rather than a high headline yield. Unfortunately, dividend growth across the FTSE 100 is expected to slow down to 5.8 per cent in 2019.
“That is the lowest rate of advance since 2015, when around a dozen FTSE 100 firms actually cut their payouts, including Tesco, Sainsbury, Standard Chartered, Centrica, Rolls-Royce, Severn Trent, Glencore, Anglo American, Fresnillo and William Morrison,” said Mould.
“The announcements of a dividend cut at Marks & Spencer, a plan to leave the annual payment unchanged at Vodafone and the flat payout at former serial-raiser Paddy Power Betfair all mean that investors must remain on their guard and cannot take the FTSE 100’s dividend yield entirely for granted.”
Just 10 stocks are expected to generate 65 per cent of 2019’s £5bn expected increase in total dividend payments, with Royal Bank of Scotland generating a fifth of that sum on its own. Together with Barclays, Standard Chartered, HSBC and Lloyds, it will account for more than a third of the total figure.
Source: AJ Bell
“The combined dividend payment from the Big Five banks is expected to exceed the pre-crisis peak of some £13bn (although that was forecast for 2018 and they slightly undershot),” Mould added.
“This makes worries over the economy, both in the UK and worldwide, particularly important as the full-year results raised concerns over the lack of progress in net interest margins, with HSBC a notable concern here.”
Another option is to look at the dividend heroes – those stocks with a record of increasing payouts to shareholders in at least every one of the past 10 years.
Mould said the acquisition of Shire by Japan’s Takeda, the demotion to the FTSE 250 of Wood Group, a flat payment from Paddy Power Betfair and Vodafone’s intention to leave its dividend unchanged in 2018 mean the number of FTSE 100 members in this club fell from 30 in December to 26 in March.
“Any firm which can achieve a streak of 10 or more increases in its annual dividend must be doing something right and, with the benefit of hindsight, blindly buying the FTSE 100’s 26 dividend heroes would have brought bumper returns to portfolio builders,” he added.
The average total return from the 30 dividend heroes over the past decade is 829 per cent, well above the FTSE 100’s figure of 181 per cent.
FTSE 100 "dividend heroes"
“Admittedly the strategy is not infallible and woe betide any firm where investors think a dividend growth streak is under duress or about to end,” Mould continued.
“Vodafone SSE and Standard Life Aberdeen were painful examples of this in 2018 and none of this trio is expected to report an increased dividend for 2019.
“But of the 26 firms to have increased their dividend in each of the past 10 years only five – British American Tobacco, Imperial Brands, Standard Life Aberdeen, BAE Systems and SSE – have failed to beat the index in capital and total return terms.”
However, it is worth noting only 13 of the 26 were actually in the FTSE 100 a decade ago, meaning investors may have to pay closer attention to the FTSE 250 to find the next generation of dividend heroes.