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Which FTSE 100 shares offer the best dividends to investors?

Which FTSE 100 shares offer the best dividends to investors?

The investment director of AJ Bell, Russ Mould, explains which FTSE 100 firms pay the highest dividends to income seekers and the likelihood 

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The investment director of AJ Bell, Russ Mould, explains which FTSE 100 firms pay the highest dividends to income seekers and the likelihood  they will stay on course.

It has been a difficult year for income seekers, as UK-listed firms have cut, deferred, suspended or even simply cancelled £50billion worth of dividend payments in the past year. 

FTSE 100 firms have been responsible for nearly £40billion of that shortfall although the good news is that 18 members of that elite index have either restarted payments or declared their intention to do so.

Shareholder rewards: Nearly a fifth of FTSE 100 firms have either restarted dividends or declared their intention to do so, says Russ Mould

Shareholder rewards: Nearly a fifth of FTSE 100 firms have either restarted dividends or declared their intention to do so, says Russ Mould

Shareholder rewards: Nearly a fifth of FTSE 100 firms have either restarted dividends or declared their intention to do so, says Russ Mould

The value of those restored payments is just £2.8billion – so far – but momentum may be gathering and 2021 is at least offering income-seekers a few rays of hope. 

This is not to say finding reliable dividends will be easy. 

The economic outlook is uncertain and any slips with the vaccination programmes or signs of a double-dip recession could send companies running for cover and persuade them to preserve rather than pay-out cash once more.

Overall, the FTSE 100 is forecast to offer a 3.8 per cent dividend yield for 2021, based on analysts’ consensus forecasts. 

That easily beats cash, government bond yields and National Savings & Insurance products – as well as inflation – but it clearly comes with capital risk. 

Nearly a third of the index offer a yield above 4 per cent (and 23 more than 5 per cent). 

The key for investors will be to find reliable payments and dodge firms which may cut or suspend again if the going gets tough, especially as a dividend cut can be accompanied by share price falls, adding capital loss insult to income loss injury.

How can you tell if a share is good value? 

Five tips to work out if a company’s stock is a winner or a dud… read more here.

Investors must therefore do careful research. 

They should look at earnings cover (to degree to which forecast earnings per share cover the forecast dividend per share) and free cash flow cover. Multiples of two or higher will offer comfort. 

They should also look at the balance sheet, to see how much debt is on there, whether there is a pension deficit or big lease obligations, and cross-reference that with operating profit.

If interest cover is good (operating profit and interest income exceed interest expenses by at least two times) then again a firm may be able to keep paying even if times take a turn for the worse.

The FTSE 100 is particularly interesting as its highest-yielding names all offer yields of 6 per cent or more. 

This may tempt some but dividend cuts at a stocks where the yield looked good on paper but did not materialise in reality again mean caution is needed – BP, Shell, Vodafone, BT, Aviva and Imperial Brands have all cut in the recent past. 

The very high yields on offer all suggest that investors view these stocks as risky and are demanding a high return to compensate themselves for the dangers involved.

The top 10 dividend payers in the FTSE 100: Dividend cover means earnings per share divided by total annual dividend, and the payout ratio refers to dividends paid  out as a proportion of net earnings

The top 10 dividend payers in the FTSE 100: Dividend cover means earnings per share divided by total annual dividend, and the payout ratio refers to dividends paid  out as a proportion of net earnings

The top 10 dividend payers in the FTSE 100: Dividend cover means earnings per share divided by total annual dividend, and the payout ratio refers to dividends paid  out as a proportion of net earnings

Of the names in the top ten, the most reliable just could be the miners. 

Rio Tinto and BHP Billiton have substantially reduced their debts and cleaned up their balance sheets, while they may be able to ride rising commodity prices should the global economy start to recover, as a bonus.

If the global economy tanks and central banks conjure up more quantitative easing and rate cuts, gold could prosper in the face of such money creation and that would help Polymetal.

Persimmon has a net cash balance sheet and operates in a market where Government support is on offer even though demand already exceeds supply. 

It also looks one of the better options from this list. Aviva’s reputation for dividend cuts precedes it, but new boss Amanda Blanc has already overseen asset disposals as part of her plan to simplify and streamline the firm.

BP is just too hard to call, even if the oil price’s recent gains are a help, as the oil major looks to reinvent itself and invest in renewable sources of energy for the future. 

The tobacco stocks are difficult, too, but in the near term their cash flow should remain strong enough to fund juicy dividends, even if the long-term regulatory push back against smoking is an understandable concern.”

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This post first appeared on Dailymail.co.uk

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