Top 20 FTSE Dividend Paying Stocks

UPDATED JANUARY 2020: Yields have dropped back as shares have risen following the election, but investors are still nervous about dividend cuts in 2020

James Gard 9 January, 2020 | 8:00AM

Pound notes

It’s a new decade but investors remain as focused as ever on getting a decent and reliable income from their shares.

Interest rates on savings remain miserly – the best instant access account pay only around 1% - and bond yields aren’t offering a credible alternative, so those needing something better will often turn to equities.

But those seeking the highest dividends on the market need to be aware that the top yields often comes with the greatest risk of frozen or axed dividends. Last year saw a number of high-profile dividend cuts, among them Vodafone, and so investors will be understandably anxious that there could be more to come in 2020. With companies gearing up for earnings season there’s bound to be a few unpleasant surprises along the way.

A noticeable trend in 2019 was for the dividend yield among under-pressure companies to soar as their share prices fell. The end of year rally on the FTSE brought some relief to these firms from a share price perspective, but many saw their headline yield fall as a result. 

Imperial Brands (IMB) closed the year as the company with the highest forward and trailing yield, and while these have both dipped in January as the share price has recovered, the trailing 12-month yield is still above 10%. We don’t recommend “yield chasing” as a strategy anyway, but anything offering 10% should make you think twice about how viable an investment it is in the long term.

The top five yielders – Imperial, BT (BT.A), SSE (SSE), HSBC (HSBA) and BP (BP.) – remain in the same position as at the end of 2019. BT, which reports third-quarter results on January 30, was tipped to cut its dividend last year but didn’t – will it bow to pressure and do so this year?

Since our last update in December, the defeat of Jeremy Corbyn’s Labour has removed the risk of nationalisation for utilities like SSE, whose share price bounced after the General Election. Despite that, its shares still yield a chunky 7.38%. “We view SSE shares as suitable for income seeker,” says Morningstar analyst Tancrede Fulop, although he thinks a tough regulatory environment will hold back future profits.

Stock

Ticker

Trailing Yield %

 Forward

Yield %

Economic Moat

Star

Rating

Morningstar Index?

Imperial Brands

IMB

10.27

14.79

Wide

4

YES

BT

BT.A

8.02

8.02

Narrow

4

YES

SSE

SSE

6.85

6.48

Narrow

2

YES

HSBC

HSBA

6.79

6.35

Narrow

4

YES

BP

BP.

6.41

6.28

Narrow

4

YES

Royal Dutch Shell B

RDSB

6.38

6.22

Narrow

4

YES

British American Tobacco

BATS

5.96

5.96

Wide

5

YES

WPP

WPP

5.60

5.60

Narrow

4

YES

Vodafone

VOD

5.21

5.21

Narrow

4

YES

Carnival

CCL

4.55

4.47

Narrow

4

YES

GlaxoSmithKline

GSK

4.54

5.22

Wide

3

YES

BAE Systems

BA.

3.83

3.19

Wide

3

YES

Unilever

ULVR

3.30

3.34

Wide

4

YES

Johnson Matthey

JMAT

2.96

2.96

Narrow

3

YES

AstraZeneca

AZN

2.86

2.86

Wide

3

YES

Reckitt Benckiser

RB.

2.82

2.38

Wide

4

YES

Pearson

PSON

2.96

1.87

Narrow

4

YES

Smiths Group

SMIN

2.67

2.67

Narrow

3

YES

Meggitt

MGGT

2.56

2.56

Narrow

3

YES

Victrex

VCT

2.36

2.36

Narrow

3

YES

             

Source: Morningstar Direct. Data at January 8

       

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 Morningstar Star Rating, which indicates whether the company’s shares are trading below or above their fair value. Some of the companies on this list, including Pearson and BP, are rated as four stars by Morningstar analysts, meaning they are currently undervalued.

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 falls 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.

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 PLC7,893.00 GBX2.41
BAE Systems PLC623.49 GBX1.28
BP PLC496.85 GBX-0.20
British American Tobacco PLC3,465.50 GBX0.07
BT Group PLC183.68 GBX0.37
Bunzl PLC2,091.00 GBX0.77
Carnival PLC3,712.00 GBX1.56
Croda International PLC5,125.00 GBX1.28
Diageo PLC3,287.50 GBX1.14
HSBC Holdings PLC596.00 GBX0.86
Imperial Brands PLC2,053.50 GBX0.98
Johnson Matthey PLC2,845.00 GBX-0.21
Lowland Ord1,455.00 GBX0.00
Meggitt PLC697.20 GBX0.52
Pearson PLC586.80 GBX4.15
Royal Dutch Shell PLC B2,265.50 GBX-0.33
SSE PLC1,495.50 GBX1.18
Unilever PLC4,398.50 GBX1.02
Victrex PLC2,426.00 GBX0.50
Vodafone Group PLC154.60 GBX-0.69
WPP PLC1,019.50 GBX-0.05

About Author

James Gard  is content editor for Morningstar.co.uk

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