Top FTSE Dividend Paying Stocks

UPDATED September 2021: Reshuffle at the top after share price weakness among big names like HSBC

James Gard 13 September, 2021 | 9:00AM
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After the excitement of the second quarter earnings season, in which UK companies announced a raft of dividend changes, the late summer period has seen activity drop off. HSBC has moved to the top of our monthly list with a yield above 4%. Yields in general have risen since our last update amid a fall in share prices among FTSE 100 stocks in early September.

The biggest development in recent weeks has been from miner BHP (BHP), which had some mixed news for UK investors. A record dividend of $2 per share was announced, taking full-year shareholder returns to $15 billion, but the company also revealed plans to move its primary listing away from London and back to Australia (subject to shareholder approval). UK shareholders have come to rely on bumper mining dividends during this turbulent period for investors, as payouts have boomed along with commodity prices. UK holders of BHP shares will become holders of the Australian equivalent shares; as Morningstar’s Mathew Hodge points out, they may end up better off because the Sydney listed shares trade at a premium.

BHP doesn’t make it on to our monthly list, because Morningstar analysts don’t assign it an economic moat. (Our companies need to have a narrow or wide moat and have a dividend cover of 1.5 or more).

The only company on our list to have reported since our last update is Bunzl (BNZL), which increased its interim dividend by 2.5% to 16.2p on last year’s payment. The distribution and outsourcing company revealed a rise in profits in the first half of 2021 and announced the purchase of two Spanish companies. Bunzl joins the six companies on our list of 20 that have raised their dividends.

September FTSE dividend table

HSBC Moves to the Top

There has been a reshuffle at the top of our list, with HSBC moving into first place ahead of serial leader Unilever (ULVR). It’s also the first time since March that a stock yielding more than 4% has topped the list (in that case it was BAE Systems). UK banks have only just signalled a return to paying dividends after an enforced pause last year and HSBC’s interim dividend is set to be paid on September 30. Followers of our monthly list will have noticed that HSBC’s expected/forward yield has gone up from 2.6% to 4.23% without any planned increase in the dividend itself. What’s happened? HSBC’s share price has fallen by 7% over the last monthand by 13% over three months, reversing some of the gains seen in the early summer. This is a regular feature of dividend investing, with yields increasing as share prices fall and vice versa. Narrow-moat Tesco (TSCO) moves from number 17 in August’s list to number two in September.

As 2020’s events showed, there is no such thing as a “safe” dividend or yield in the FTSE 100. With many companies reinstating or raising payouts this year, where does that leave investors? Our list doesn’t feature the FTSE 100’s highest yielders, which are led by the miners and tobacco companies. 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.

Moats and Dividend Cover

To make it on to our monthly list, a company must have a wide or narrow economic moat and have a dividend cover of more than 1.5 times its annual earnings (we’ve raised this from 1.25 times earnings). A dividend cover of 2 is usually considered a safe buffer for companies – this means they can pay out dividends two times from annual earnings.

All of the companies on our screen are part of the Morningstar UK Index, which is up 15.2% in the year to date after an 11% fall in 2020, helped by the gains for value stocks so far in 2021. The UK has a high weighting towards these kind of economically sensitive stocks, which was a big drag on performance last year but helped in 2021 – our monthly Market Barometer shows that the value style of investing still has the upper hand this year, although there are signs that growth stocks are starting to catch up as the value rally runs out of steam.

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
Bunzl PLC2,508.00 GBX-1.65Rating
ConvaTec Group PLC222.50 GBX-0.22Rating
Diageo PLC3,458.00 GBX-0.26Rating
EVRAZ PLC586.00 GBX-1.88
Experian PLC3,312.00 GBX-1.05Rating
GlaxoSmithKline PLC1,388.20 GBX-0.49Rating
Intertek Group PLC5,334.00 GBX-1.08Rating
Johnson Matthey PLC2,678.00 GBX-0.81Rating
London Stock Exchange Group PLC8,010.00 GBX-1.60Rating
Pearson PLC720.60 GBX-0.69Rating
Reckitt Benckiser Group PLC5,862.00 GBX-0.53Rating
RELX PLC2,196.00 GBX-0.09Rating
Schroders PLC3,837.00 GBX-0.88Rating
Smith & Nephew PLC1,328.50 GBX-1.67Rating
Unilever PLC3,918.00 GBX-0.71Rating

About Author

James Gard  is content editor for Morningstar.co.uk

 

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