Top 20 FTSE Dividend Paying Stocks

UPDATED AUGUST 2019: Imperial Brands and SSE top our list of current and future high dividend payers

James Gard 2 July, 2019 | 8:00AM

Pound notes

Each month we crunch the numbers to find you the most reliable, high dividend payers in the FTSE. With plenty of big names cutting their dividend payments this year, the quest for steady income is more important than ever. We have aimed to weed out the firms which have high pay outs one year only to slash them the next, focusing on firms with competitive advantages and a fair share price.

Our top 20 list of dividend payers has tobacco firm Imperial Brands (IMB) just at the top with a yield above 9% – but utility SSE (SSE) has a higher forward yield. Imperial recently said it was dropping its ambitious target of growing the dividend 10% a year and will now pay out flexibly depending on market conditions. This is a recent example of why investors need to keep in mind what the historic dividend has been but also what a company plans to pay out in the future. Imperial’s trailing yield of 9% slides to a still perfectly respectable 6% in this case.

Three of the top five dividend yields on our list have a five-star rating, which means analysts estimate they are significantly undervalued – of those, WPP (WPP)and BT (BT.A) have yields of below 7%, which is not significantly high for a FTSE 100 income stock.

The flipside is also true: those with the lowest yield tend to be those with two-star ratings, such as Experian (EXPN) and Diageo (DGE), whose shares have performed strong this year. Morningstar rates these shares as significantly overvalued.

Out of 20 companies on our list, only two are outside the FTSE 100: manufacturing firm Victrex (VCT) is on the FTSE 250, as is engineering company Meggitt (MGGT). The largest UK companies are generally better capitalised than mid-caps and smaller companies and are less prone to offering sky-high yields. Last time we wrote about the FTSE’s biggest-yielding shares, small-cap retailer Bonmarche (BON) was offering a yield above 60%, but the company is about to be de-listed after it owner took it private.

There is no guaranteed way to ensure that an income stock doesn’t cut its payout. An abnormally high yield is often an early warning sign, but there are exceptions: housebuilder Persimmon (PSN) has a yield over 12% but is sitting on cash of over £1 billion. And a high yield is sometimes a reflection of a depressed share price and weak investor sentiment about the sector – for example Lloyds Banking Group (LLOY) – rather than a sign the company is struggling to keep up with its dividend payments.

Dividend table

How We Select Companies

Morningstar.co.uk has filtered 20 income shares using a range of criteria. Each income stock must have an “economic moat”, which means that the company has a sustainable competitive advantage. Stocks with a “narrow” or “wide” moat make the cut. We then add in the star-rating, which indicates whether the company’s shares are trading below or above their fair value.

Dividend cover is then added to the list. The dividend cover measures how much of a company’s yearly earnings are used to pay the dividends: a ratio of 1:1 means a firm is ploughing all of its profits back to shareholders. While Reckitt doesn’t have the highest yield on the list, its dividend cover ratio of 2.97% means that it could afford to pay the dividend three times from current earnings. London Stock Exchange (LSE) has the highest dividend cover on the list but the lowest yield, which suggests that the a very well covered dividend is the trade off for a sub-inflation yield. Perhaps this is telling us that the LSE could be paying out more of its earnings to shareholders?

We also look at the historic yield (trailing 12 months) and compare that with the forward yield.

Another filter is then added to screen for those companies those five-year dividend yield is less than 15%. This adds an element of consistency – for example, a one-off special dividend would skew the yield in one year to an artificially high level – and remove companies whose share price plunge has pushed the yield up significantly.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Bonmarche Holdings PLC  
Diageo PLC3,452.00 GBX1.07
Experian PLC2,518.00 GBX0.72
HSBC Holdings PLC597.20 GBX1.00
Imperial Brands PLC2,089.00 GBX0.05
Lloyds Banking Group PLC0.83 GBP-1.76
Meggitt PLC609.00 GBX-0.59
Persimmon PLC1,841.00 GBX0.27
SSE PLC1,107.00 GBX0.27
Victrex PLC1,873.00 GBX1.52

About Author

James Gard  is content editor for Morningstar.co.uk

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