Dividend pay-outs from FTSE 100 stocks are tipped to rise to a record level this year thanks to the weakness of the pound.
Wealth management firm AJ Bell’s dividend dashboard for the second quarter noted that dividend heavyweights BP, Shell and HSBC all declare their pay-outs in US dollars, and so the foreign exchange translation effect is expected to provide the biggest single contribution to dividend growth in 2018.
READ: Do dividends still not lie? (A word to the Weiss)
Russ Mould, the seemingly omnipresent investment director of AJ Bell, said financial and oil stocks dominate in terms of their dividend contribution.
“Between them, Shell, BP and HSBC are forecast to offer dividends worth £25 billion or 29% of the total, using a dollar-sterling cross rate of $1.34,” Mould observed.
Swiss miner and commodities trader Glencore, which is expected to resume dividend payments – in dollars – after a two-year hiatus is expected to add about £2.2bn to the dividend pot.
“Overall, the ten highest dividend paying firms are forecast to pay out over half the FTSE 100 dividends on their own, a total of £47.4 billion,” Mould said.
Although it sometimes seems that the UK economy is swimming through treacle, it is worth noting that a many of the companies in the FTSE 100 are not particularly reliant on the UK economy to earn their corn.
The Big Five Banks finally seem ready to put the credit crunch behind them
According to AJ Bell’s review of the market, things are actually looking up, in part because the Big Five banks finally seem to be emerging from the wreckage of the previous decade’s credit crunch.
“The combined dividend payment from the Big Five banks is expected to exceed the pre-crisis peak of some £13 billion, helped by Barclays plans to more than double its distribution to 6.5p a share and the consensus assumption that RBS will begin to pay dividends once more,” Mould commented.
All of this dividend largesse points to the FTSE 100 offering a yield of 4.1% for 2018 based on forecast dividend payments; try getting that from gilts or saving accounts.
A mixed story on dividend cover
Meanwhile, dividend cover – the extent to which distributions are covered by retained earnings (dividend per share divided by earnings per share) – continues to improve, rising to 1.75, based on earnings forecasts.
This is the best dividend cover ratio since 2014, which was the last time that dividends were covered more than twice by earnings – generally accepted to be a safe level of dividend cover by income investors.
“The average cover across the 10 highest yielding stocks in the FTSE 100 has, however, slipped back to 1.29 times, compared to 1.42 times in March,” Mould warned.
“This is partly because recent share price falls mean that Vodafone and BT are now among the ten highest yielding stocks and their cover ratios are 0.8 times and 1.7 times respectively. Recent weakness in the share prices of the house builders also means three such firms now feature in the list of ten highest yielding stocks. Earnings cover here is thin although all three have net cash balance sheets,” he noted.
Based on forecasts compiled by data aggregator Factset, the 10 Footsie stocks offering the highest dividend yields are as follows (with forecast yields and forecast dividend cover given in brackets:
Forecast dividend
yield 2018
Forecast dividend
cover 2018
8.7%
1.01x
Evraz
8.4%
1.68x
8.4%
1.14x
8.0%
1.36x
8.0%
1.12x
7.7%
1.49x
BT
7.5%
1.71x
7.4%
1.38x
SSE
7.2%
1.26x
6.8%
0.76x
Average
1.29 x