Top FTSE Dividend Paying Stocks

UPDATED for June 2022: Earnings updates may have been somewhat quiet in recent days, but there is still plenty to digest in our top dividend payers list

James Gard 28 June, 2022 | 10:58AM Sunniva Kolostyak
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Dividend

Dividend updates have been relatively thin on the ground in June as we await the end of the second quarter and the cranking up of the next reporting season.

Still, there has been plenty of corporate news to digest, and volatile share prices have pushed yields in many cases. Year-to-date share price figures also become more meaningful as we approach the second half of the year.

Cigarette makers Imperial Brands (IMB) and British American Tobacco (BATS) remain in the familiar number one and two slots, with expected yields of 7.59% and 6.17% respectively.

Imperial nudged up its dividend during its most recent results, upping the ante for BATS to do something similar when it reports on July 27 – we will cover that in our next dividend update. At number three on our list, Vodafone (VOD) is due to post a trading update that week too. Its yield has crept up above 6% and in share price terms Vodafone has posted a respectable 10% gain so far this year (its shares are now fairly valued, according to our analysts).

While the top three yielders remain the same in June as they did in May, Lloyds Banking Group (LLOY) has shuffled up to the fourth slot and investment manager Schroders (SDR) has moved up to position five.

June 2022 Update: Which Companies Are Undervalued?

We are fast approaching the halfway mark for 2022, an already eventful and volatile year for the markets. So what’s the scorecard for our dividend picks and what companies remain undervalued after the recent shakeout?

My US colleagues David Harrell and Dan Lefkovitz recently had a useful discussion about the merits of income investing in tougher economic and market conditions.

While income is our main focus in this article, in these choppy markets it’s useful to see whether many of these defensive companies have been able to show resilience.

Given the market turbulence in 2022, one would expect some share price weakness in a list of the biggest UK companies, and 16 out of the 24 stocks are sitting on negative returns so far. Nine of these are nursing double-digit losses, and for comparison the FTSE 100 is off around 3% and the FTSE All Share is 6% lower.

This index performance is better than some more growth-focused markets such as the S&P 500. A lot of UK stocks are being revalued in this new world of war and higher inflation, and many of them are decent dividend payers. But a range of share price returns – from -30% to +42% – suggests investors can rarely have the best of both worlds: a high yield and a rising share price.

Despite an 11% increase so far this year, Imperial Brands is the only company to have a 5-star rating, meaning under Morningstar analysis that the shares are significantly undervalued. The list is then dominated by 4-star stocks like HSBC (HSBA) and GSK (GSK), which is splitting into two companies next month, one focused on pharma and the other on consumer healthcare.

Three of the companies are considered overvalued according to our metrics, and it’s inevitable BAE Systems (BA.) is part of that group after its 42% share price gain this year. European governments are revaluing their defence spending in the light of Russian aggression, and that has lifted defence stocks across the world – posing a problem for ESG investors.

To make it on to our list, companies need to have a narrow or wide economic moat, pay a dividend and have a forward yield of 2% or more. And they have to be in the FTSE 100. Of the 37 stocks which make the grade on these criteria, only 24 have a yield above 2%. As last month, drinks company Diageo (DGE) and vaccine giant AstraZeneca (AZN) mark the cut-off line between inclusion and exclusion to the top 24. With inflation at over 9% and a UK 10-year gilt yielding 2.35%, there’s probably a strong argument for raising the hurdle rate for our dividend list to 3%. That would slim the 37-name list down to 13, shutting out dividend stalwarts like Reckitt (RKT).

How is the FTSE Changing?

As we are concerned exclusively with FTSE 100 dividends, it’s worth noting the changes to the list of Britain’s biggest companies.

ITV (ITV) and Royal Mail (RMG) are leaving the index for the FTSE 250, to be replaced by Centrica (CNA) and housing group Unite (UTG). The British Gas owner is one of 313 stocks covered by Morningstar that have a 5-star rating, meaning they are significantly undervalued. It’s one of 15 UK stocks with this rating, but it’s the only utility. This may seem unusual given the backdrop of surging energy prices and a 12% rise in the share price in 2022 and 63% over the year.

But Centrica doesn’t make the cut in our monthly list because it doesn’t have an economic moat, whether narrow or wide. The company hasn’t paid a dividend since June 22, 2020, but investors are expecting that this will be restored this year – and are eagerly awaiting Centrica’s interim results on July 28, where more news is expected.

This monthly update on dividends is one of our most popular stories on Morningstar.co.uk, so we assume readers are pro-income. But we are open to a wide range of ideas here, so we urge you to read UK editor Ollie Smith’s opinion piece on the dark side of dividends, and why in certain listed sectors like transport and travel they may be an obstacle to good governance. The woes of the UK transport structure are complex and with no easy solutions – we’ll be revisiting this topic in the coming weeks.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Admiral Group PLC2,225.00 GBX-0.13Rating
AstraZeneca PLC10,800.00 GBX-0.07Rating
BAE Systems PLC804.60 GBX-3.76Rating
BP PLC373.30 GBX-7.01Rating
British American Tobacco PLC3,426.00 GBX-3.78Rating
BT Group PLC189.15 GBX-0.66Rating
Burberry Group PLC1,580.00 GBX-3.57Rating
Centrica PLC76.00 GBX-7.14Rating
CRH PLC2,759.50 GBX-2.78Rating
Diageo PLC3,507.00 GBX0.34Rating
HSBC Holdings PLC523.10 GBX-3.08Rating
Imperial Brands PLC1,778.00 GBX-3.34Rating
Intertek Group PLC4,210.00 GBX-0.43Rating
Johnson Matthey PLC1,818.50 GBX-4.39Rating
Meggitt PLC788.80 GBX0.00Rating
Reckitt Benckiser Group PLC6,216.00 GBX-0.26Rating
RELX PLC2,189.00 GBX-2.10Rating
Schroders PLC2,578.00 GBX-2.64
Shell PLC2,016.00 GBX-8.49Rating
Vodafone Group PLC127.00 GBX-1.29Rating
WPP PLC761.60 GBX-5.41Rating

About Author

James Gard  is senior editor for Morningstar.co.uk