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Top 20 FTSE Dividend Paying Stocks

UPDATED NOVEMBER 2019: No recent dividend cuts from our list of blue-chip income payers, but the threat of nationalisation hangs over some big income names like SSE and BT

James Gard 18 November, 2019 | 8:00AM

Pound notes

Quarterly earnings season is just about over for Britain’s biggest companies and investors will be relieved that there were few dividend cuts announced alongside the market updates. Neither were there any high-profile dividend hikes, but that is part of a global trend, as Janus Henderson’s latest dividend survey reveals.

Marks & Spencer (MKS) is not on our list of high dividend payers – because analysts don’t think it possesses an Economic Moat, or competitive advantage – but if it was there would be a black mark against its name for cutting its dividend by 40%.

Number two on our list, FTSE 100 telecoms firm BT (BT.A) yet again defied expectations that it would cut its dividend, despite higher costs and lower revenues in its half-year results. Labour party plans to nationalise the company and offer “broadband for all” if it is elected next month may be preoccupying investors more than changes to its payout. For the company, it is business as usual in its strategy inherited from former boss Gavin Patterson – last week it beat Sky and ITV in winning Champions League football rights for £1.2 billion in a five-year deal.

Overall, headline dividend yields on our list have softened month-on-month because share prices have nudged higher in what has been a strong period for stock markets generally. Tobacco giants Imperial (IMB) and British American Tobacco (BATS) are still yielding more than 7%, but the US vaping scandal is creating stink in the sector and Imperial has not yet announced a replacement for boss Alison Cooper.

SSE (SSE) is also in the 7% club, and Morningstar analysts are comfortable with its dividend policy. “Shares look fairly valued but its dividend yield of 6.5% - 37% above the sector average – makes SSE shares suitable for income seekers,” says analyst Tancrede Fulop. Like BT, the threat of Labour nationalisation is overhanging the company’s valuation.

Oil giants BP (BP.) and Shell (RDSB) are offering yields above 6%, putting them in the top 10 of our list of high dividend payers. Morningstar analysts think Shell can cover its dividend with free cashflow with oil prices at $55 a barrel and BP can do this at $50 a barrel. WTI crude oil prices are currently at $57 a barrel, and despite a brief spike in September when Saudi Arabian oil facilities were attacked, oil has been under pressure this year.

“As oil prices rise, we expect excess cash flow to go toward increasing the dividend and reducing debt and repurchasing shares,” adds analyst Allen Good.

Morningstar analysts have been refining their dividend coverage this month: our latest review of the European banks puts UK’s Lloyds Banking Group (LLOY) among a select group of “safe” dividends. The report’s authors, analysts Johan Scholtz and Niklas Kammer, are more relaxed about dividend cuts than the axing of a dividend altogether or offering investors shares in lieu of cash (also known as “scrip dividends”).

“We do not necessarily believe that a dividend lowered in line with a moderate earnings decline is problematic,” they explain. “We would much rather see management cut dividends and follow a rational dividend policy where the dividend is tied to a portion of earnings than continue to pay out an unsustainable portion of earnings and threaten the bank's capital adequacy.”

             

Stock

Ticker

Yield %

Forward Yield %

Economic Moat

Morningstar Rating For Stocks

Morningstar Index?

Imperial Brands

IMB

10.8

11.53

Wide

5

YES

BT

BT.A

7.97

7.97

Narrow

4

YES

SSE

SSE

7.64

7.64

Narrow

3

YES

British American Tobacco

BATS

7.07

7.14

Wide

5

YES

HSBC

HSBA

6.66

5.38

Narrow

4

YES

Royal Dutch Shell B

RDSB

6.32

6.25

Narrow

4

YES

BP

BP.

6.26

6.22

Narrow

4

YES

WPP

WPP

6.04

6.04

Narrow

5

YES

Vodafone

VOD

4.94

4.94

Narrow

4

YES

Carnival

CCL

4.89

4.89

Narrow

4

YES

GlaxoSmithKline

GSK

4.65

4.41

Wide

3

YES

BAE Systems

BA.

3.88

3.22

Wide

3

YES

Unilever

ULVR

3.02

3.05

Wide

3

YES

AstraZeneca

AZN

2.98

2.98

Wide

3

YES

Reckitt Benckiser

RB.

2.93

2.47

Wide

4

YES

Smiths Group

SMIN

2.78

2.78

Narrow

4

YES

Pearson

PSON

2.69

1.7

Narrow

4

YES

Meggitt

MGGT

2.65

2.65

Narrow

3

YES

Johnson Matthey

JMAT

2.64

2.64

Narrow

3

YES

Victrex

VCT

2.56

2.56

Narrow

3

YES

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.

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 whose 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.

There is an inverse relationship between share prices and yield – the dividend yield on a company will rise when the share price rises and vice versa. That’s why the top 10 on our list is dominated by companies with a Morningstar Rating for Stocks of 5 and 4 stars, which means analysts think they are trading below their fair values.

For the first time we have included information on whether the stock is a member of a Morningstar index: for example, Imperial Brands is a member of “Morningstar Global Consumer Defensive” and “Morningstar Global Tobacco”, among others.

 

 

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
AstraZeneca PLC7,383.00 GBX1.86
BAE Systems PLC576.00 GBX0.49
British American Tobacco PLC2,878.00 GBX0.91
BT Group PLC192.54 GBX-0.24
Bunzl PLC2,043.00 GBX0.94
Carnival PLC3,221.00 GBX-0.80
Croda International PLC4,720.00 GBX-0.55
Diageo PLC3,107.00 GBX0.34
HSBC Holdings PLC575.00 GBX0.23
Imperial Brands PLC1,752.60 GBX1.17
Johnson Matthey PLC3,165.00 GBX-2.19
Meggitt PLC630.00 GBX0.19
Pearson PLC671.60 GBX-1.00
Royal Dutch Shell PLC B2,276.00 GBX-0.72
SSE PLC1,338.19 GBX2.23
Unilever PLC4,552.06 GBX-0.35
Victrex PLC2,360.00 GBX0.17
Vodafone Group PLC152.12 GBX-1.60
WPP PLC978.11 GBX-0.98

About Author

James Gard  is content editor for Morningstar.co.uk

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