Blue-chip companies on the FTSE 100 are expected to have returned £77.8bn of dividends to shareholders in 2023, according to AJ Bell’s latest Dividend Dashboard.
The report considers the highest best dividend yields in the FTSE 100, based on company data and forecasts by City analysts.
It can be a good place to start when looking for investments as it provides an indication of companies that are generating enough cash and profits to reward shareholders.
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This figure has been downgraded from earlier forecasts of £78.7 billion though, due to fears of a recession, high interest rates and volatile commodity prices.
FTSE 100 dividends feel the heat
At the end of 2022, AJ Bell says analysts were projecting a record dividend haul for people buying UK stocks, surpassing the all-time high of £85.2bn returned in 2018.
But aggregate dividend forecasts for 2023 and 2024 continue to slide, with estimates for each year now around 10% lower than a year ago, AJ Bell said.
Falling profits across the blue-chip index and concerns about the economic outlook are to blame for lower income projections.
Russ Mould, investment director at AJ Bell, says the FTSE 100 continues to "paddle sideways" and is no higher than twelve months ago or indeed six years ago, especially compared with the strong performance of the US stock market.
"Competition from gilts and even cash in the bank may be one reason why the FTSE 100 is failing to make any major progress," he says
“Another is worries that the long-awaited recession may finally take hold in 2024, even as the Sunak-Hunt administration tries to provide some boost to the economy."
Aggregate profit estimates for 2023 and 2024 keep drifting lower, even if the FTSE 100’s members earn more in total overseas than in the UK, the report warns.
"The hefty portion of earnings from unpredictable sectors such as miners and oils, and economically sensitive ones such as banks and consumer discretionary, may not help here," adds Mould.
The combination of a £2 trillion market capitalisation and aggregate ordinary dividend forecasts of £77.8 billion for 2023 and £83.7 billion in 2024 mean the FTSE 100 offers a forecast dividend yield of 3.9% for this year and 4.2% for next.
That compares to 4.5% for two-year gilts and 4% for ten-year gilts, which offer tax-free gains and come with less capital risk, the report highlights.
However, the value of share buyback announcements keeps growing even if dividends are lower, offering an alternative way to return cash to investors.
FTSE 100 companies announced share buybacks worth £54.7 billion so far this year, not too far behind 2022’s all-time high of £58.2 billion.
If this is added to dividend payouts, that means FTSE 100 firms are primed to return £137.2 billion to their shareholders in 2023, a tiny fraction below 2022’s all-time high of £137.6 billion. That figure equates to 6.9% of the FTSE 100’s market capitalisation.
“This compares favourably to the prevailing rate of inflation, exceeds the Bank of England base rate of 5.25% and handily beats the yield available from two and ten-year gilts at the time of writing," adds Mould.
"Although it can be hard for retail investors to participate in, and benefit from, share buyback schemes.
“That is one potential caveat to this cash bonanza. Another is how much easier it is for a company to start a buyback than it is to commit to a higher dividend and how there tends to be less critical comment and share price reaction if a buyback is halted compared to when a dividend is cut.”
Here is a list of the companies where you will currently find the ten best dividends.
The highest dividend yields in the FTSE 100
Swipe to scroll horizontally
| Company | Dividend yield 2023 |
|---|---|
| Phoenix Group (LSE: PHNX) | 11% |
| Vodafone (LSE: VOD) | 10.8% |
| British American Tobacco (LSE: BATS) | 10.6% |
| M&G (LSE: MNG) | 9.2% |
| Legal & General (LSE: LGEN) | 8.6% |
| Imperial Brands (LSE: IMB) | 8.1% |
| St James's Place (LSE: STJ) | 8% |
| NatWest (LSE: NWG) | 7.8% |
| Aviva (LSE: AV) | 7.7% |
| Glencore (GLEN) | 7.4% |
Can investors trust these companies to deliver?
This list is dominated by companies in the financial services sector. Pension giants Phoenix, M&G, Legal & General and Aviva, all offer inflation-beating dividend yields.
These businesses are more likely to offer sustainable dividends than most as they’re highly regulated. Therefore, they’ll only pay what they can afford to and are allowed to by the regulator.
Also, cashflow from the management of pension assets and insurance products offered are relatively predictable over the long term. This means management has a lot more visibility over cash flows and can set dividends accordingly.
Vodafone and British American Tobacco (BAT), also offer double-digit percentage yields, but AJ Bell suggests this may reflect the market’s lack of faith in those companies’ earnings growth potential.
"Investors are demanding a very high yield to compensate themselves for the risks that are perceived to come with holding the stock," the report says.
It highlights that Vodafone, which has pressures from high levels of debt, has cut its dividend once in its history while British American Tobacco has never done so but is facing falling sales due to declining smoking rates.
The outlook for other companies on the list is a bit more uncertain. NatWest benefits from higher interest rates, which means it charge more to borrowers. However, if the economy starts to stutter, they may have to deal with higher loan write-offs in their portfolio. They’re also likely to have to pay out higher rates of interest to savers to keep their business. This could hit profit margins and force the lenders to reduce shareholder returns to focus on profits.
Companies can quickly see their fortunes change. For example, Taylor Wimpey has fallen out of the top ten compared with the third quarter, perhaps reflecting concerns about the health of the property market and how confident people will be about buying or selling property in 2024.
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