Positive outlook for UK dividends, but some banana skins remain
With the FTSE’s current level of 7,544, that equates to a yield of 4.3%, significantly higher than the top-paying easy-access savings account (Post Office – 1.3%) or the 10-year government gilt yield of 1.2%.
While this higher income should be supportive for markets in 2018, dividend cover is still a source of concern. ‘Dividend cover’ is the extent to which the dividend is covered by the company’s earnings.
Earnings cover for dividends paid by the FTSE 100 as a whole remains at 1.63 times for 2018. AJ Bell points out this is significantly below the ideal 2.0 level and the level seen in the midst of the financial crisis ten years ago.
The group highlight the ‘dividend danger zone’ where dividend cover looks particularly thin, set out in the table below:
Dividend concentration is high with financial stocks, particularly the large banks and insurers, likely to be very important for income seekers in 2018, driving nearly half of the FTSE 100’s dividend growth next year. Consumer staples (tobacco, beverages, food retailers) and consumer discretionary (Sky in particular), are also forecast to boost shareholder payouts.
The bulk of the FTSE 100 dividend payments come from a relatively small proportion of the index. The top 10 dividend payers on their own are forecast to represent over half (55%) of the total shareholder pay outs in 2018.
This includes Royal Dutch Shell, HSBC, BP, British American Tobacco, GlaxoSmithKline, Vodafone, Lloyds, AstraZeneca, Rio Tinto and Glencore.
Russ Mould, investment director at AJ Bell, said: “The issue of skinny dividend cover refuses to go away. Earnings cover for dividends remains much thinner than ideal at 1.63 for 2018 and there has been little real improvement here in 2017. Ideally earnings cover needs to be around the 2.0 level to offer a margin of safety to dividend payments, should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.
“Pearson and Provident Financial are both examples of what can happen in the event of a profits stumble under such circumstances, as both had been offering apparently juicy yields but with skinny earnings cover. Indeed, some of the companies with the juiciest looking dividend yields have dividend cover that looks particularly malnourished at 1.37.”