Top FTSE Dividend Paying Stocks

UPDATED October 2021: Earnings updates will be closely watched in coming weeks for dividend news, while tobacco giants make a comeback

Sunniva Kolostyak 12 October, 2021 | 9:00AM James Gard
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As investors await the latest flood of third quarter earnings updates from UK companies, the direction of travel still seems to be positive, with plenty of companies maintaining or increasing payouts in recent weeks and months.

While Tesco (TSCO) is not on our monthly list of FTSE 100 high yielders, it’s one of the most high profile examples of a company handing cash back to shareholders. After its bumper £5 billion special dividend earlier this year, Britain’s largest supermarket chain announced it would buy back £500 million of shares and aim to pay out around 50% of total earnings. For more on Tesco, see our stock of the week column.

We’ve had a bit of a refresh this month, both in visual terms and in methodology. Now we’ve removed a dividend cover of 1.5 times earnings as a hurdle, our monthly table welcomes back the two largest tobacco companies, Imperial Brands (BATS) and British American Tobacco (IMB), which top the FTSE list by a significant gap based on expected or forward yield. We’re not downgrading dividend cover as a measure of income safety, it’s just that after last year’s dividend chaos, investors are recalibrating their perception of “safety”. Ideally, a company would have a dividend cover of 2 times earnings – effectively being able to pay shareholder twice from annual profits – but post-Covid, many of the old yardsticks are being questioned or thrown out altogether.

To make it on to our monthly list, the stock needs to be in the FTSE 100, covered by Morningstar, have a narrow or wide economic moat, and have a forward yield of more than 2% (the FTSE 100 average is higher than this).

BATS featured in our series on cheap stocks earlier this summer and the two companies are the only UK stocks we cover that have a wide economic moat and are rated as 5 stars, which means they are significantly undervalued too.

While the perils of “yield chasing” were amply demonstrated during the Covid crisis last year, when high yields fell like dominoes, BATS at least held the line last year, actually increasing its dividend year on year from 2019 to 2020, and maintained its 10-year winning streak. Imperial Brands did cut its dividend last year, but had already signalled changes to its (generous/unsustainable) dividend policy before the pandemic. Cigarette smokers are usually loyal customers and there are opportunities in heated tobacco and e-cigarettes that are likely to prove lucrative. Tobacco stocks have traditionally been strong income payers, and BAT currently yields 8.54%, while Imperial is this month’s top yielder with 9.24%.

Not surprisingly, the change in criteria means a significant reshuffle of the monthly list.

Last month’s number one HSBC (HSBA) and serial leader Unilever (ULVR) both dropped to number eight and nine on the list respectively, giving way to the tobacco comeback stars, as well as Vodafone (VOD) and GlaxoSmithKline (GSK), among others.

Vodafone has secured a solid third place this month as the “best of the rest”. The telecoms company’s shares have softened this year as its key European markets have slowly recovered from the pandemic. We explain more in the Morningstar minute video series. Morningstar analysts think the shares are attractively valued at around 110p, way below their fair value of 185p, earning it a 4-star rating. Despite a dividend cut before the pandemic, the stock yields nearly 7%, much higher than the FTSE 100 average.

Smiths Group (SMIN) is one of the companies on our list to have updated the market. The engineering firm, which has just completed a restructuring programme, revealed that for the financial year, revenue was down 5.5%. But, reduced operating costs helped pretax profits for the multi-armed company, which almost doubled. It declared a final dividend payout of 26p, taking the total to 37.7p, up 7.7% from 35.0p paid a year ago. It ranks number five on our list as we expect the dividend yield to reach 5.09%.

With many companies reinstating or raising payouts this year, where does that leave investors?

As my colleague, research analyst Daniel Sotiroff, points out, the balance between yield and quality is tricky but achievable. He was talking about income ETFs but his principles could equally apply to income funds or DIY portfolios. “Great dividend-income strategies take steps to control their exposure to firms whose dividends might be at risk. It’s a careful compromise between two competing forces, balancing yield with financial stability. Often the best portfolios land somewhere in the middle. They don’t have the highest yields, nor do they strictly focus on the highest-quality stocks.

“Well-constructed dividend-income portfolios should have above-average yields and above-average quality characteristics, like high profitability and low or reasonable dividend payout ratios.”

Dividend Tax Increases

In September the UK Government announced changes to dividend taxation as part of a fiscal shake-up that included National Insurance contributions. The basic, higher and additional rate of dividend tax is going up 1.25 percentage points to 8.75%, 33.75% and 39.35% respectively. But most investors will be able to shield dividends from tax in Isas (and pensions), and there’s an additional £2,000 annual dividend allowance. Laura Suter, head of personal finance at AJ Bell, says only an investor with a portfolio of £50,000 or over yielding 4% would pay tax on their dividends, assuming Isa alllowances had been fully utilised. In this position, a basic rate taxpayer receiving dividends of £5,000 a year now pays £225 in tax and this would rise to £263 under the new rules; for higher rate taxpayers they would pay £1,013 in tax from next April, from £975 in this tax year.

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
Bunzl PLC2,538.00 GBX0.67Rating
ConvaTec Group PLC206.40 GBX1.57Rating
Diageo PLC3,607.50 GBX-0.22Rating
EVRAZ PLC629.60 GBX1.98
Experian PLC3,229.00 GBX0.81Rating
GlaxoSmithKline PLC1,395.60 GBX-0.29Rating
Intertek Group PLC4,944.00 GBX-0.84Rating
Johnson Matthey PLC2,691.00 GBX-1.28Rating
London Stock Exchange Group PLC7,922.00 GBX0.18Rating
Pearson PLC615.20 GBX-0.84Rating
Reckitt Benckiser Group PLC5,500.00 GBX0.95Rating
RELX PLC2,192.00 GBX0.23Rating
Schroders PLC3,576.00 GBX-0.64Rating
Smith & Nephew PLC1,261.00 GBX-1.25Rating
Unilever PLC3,838.50 GBX-0.39Rating

About Author

Sunniva Kolostyak  is data journalist for