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Dividend growth more important than headline yield history suggests

Paloma Kubiak
Written By:
Paloma Kubiak

Investors may want to look at stocks offering consistent dividend growth rather than headline dividend yields, as history reveals cuts often precede poor returns.

The 20 worst performing stocks in the FTSE 100 over the past decade have all cut their dividends at some point, analysis reveals.

As a result, all but four of these firms have delivered a negative total return over the period, including capital growth and dividends.

In the worst case, a £5,000 investment in Royal Bank of Scotland 10 years ago would have been turned into just £191 as of 4 July.

Investments in other banking giants would have also resulted in negative total return: Lloyds at £1,238 and Barclays at £1,664.

Conversely, of the top 20 performers over the decade, 14 have increased their dividend every year.

ARM Holdings is at the top of the table having turned a £5,000 investment into £54,085 over the past decade.

In second place is Paddy Power Betfair at £51,422, and in third is Ashtead returning £43,058.

The analysis by online investment platform AJ Bell reveals that even the firms without 10 years of consistent dividend growth still have a strong record of increasing dividends in eight or nine out of the 10 years, Randgold Resources being the only exception.

The below two tables highlight the top 20 best and worst performing FTSE 100 stocks:



Russ Mould, investment director at AJ Bell, said: “These trends highlight an important consideration for retail investors. It is consistent dividend growth, underpinned by earnings and profit, that drives shareholder return, rather than headline dividend yields that might not be sustainable.

“This is particularly relevant at this time when investors may be attracted to the prospective 3.5% yield on offer from the FTSE 100, compared to the paltry 0.75% 10-Year Gilt yield. Several FTSE 100 firms are on prospective dividend yields that look particularly attractive, such as Lloyds at over 8%.”

Mould added that dividend cover (the number of times a company’s earnings cover the dividend payment, eg. a £10 dividend and £20 earnings would be 2x cover) is just 1.5x earnings for the FTSE 100 for 2016, based on analysts’ consensus forecasts.

“This is some way below the 2x ratio that provides real comfort. So, if profits come under pressure, dividends may too and history shows that dividend cuts often precede a period of poor returns for investors,” he said.

Top 10 forecast dividend yields post Brexit vote

AJ Bell gives the top 10 forecast dividend yields against earnings cover: