10 high yielding shares in the FTSE 100: how safe are their dividends?

FTSE 100 dividend yields look good - but dividend cover is dangerously thin

Projected dividend payments from FTSE 100 companies have been revised downward for 2018, according to research from AJ Bell’s Dividend Dashboard. 

FTSE 100 companies are expected to pay out a collective £87.5 billion in dividend payments this year, down from the previous forecast of £88.5 billion, which was made at the start of the year. 

However, this still equates to a yield of 4.4 per cent, higher than returns on cash or government bonds. 

Indeed, the projected yield of 4.4 per cent is higher than the previous projection of 4.3 per cent, despite the overall decline in total dividend payouts. This is due to the market’s various dips in March and April. As share prices dipped, dividend forecasts remained unchanged, pushing forecasted yields higher.

Indeed, this has pushed the projected dividend yield for many FTSE 100 covers into questionable territory. 

As Russ Mould, investment director at AJ Bell, notes: ‘With the exception of Persimmon, all of those firms have seen share price weakness over the past year.  Centrica, SSE, Imperial Brands, BT and M&S have all fared particularly badly and the recent 50 per cent fall in the share price of Micro Focus has catapulted it into the list of top ten yielders.’

How safe are the top 10 dividend payers?

‘The question now is whether these juicy looking yields are sustainable and the issue of skinny dividend cover refuses to go away,’ says Mould. 

Forecasted dividend cover for the top 10 FTSE 100 dividend yielders has increase slightly since the previous quarter, going from 1.37 to 1.42. 

However, cover remains dangerous thin. Only one entrant in the top 10 has a cover over 2, Micro Focus. At the same time, just three of the top 10 have a dividend cover that is forecast to be above 1.5 – relatively safe but still way below the comfort zone of 2 or higher. The remaining seven fall short of even that – although none are below 1.  

Mould urges caution investing in these top dividend yielders with thin dividend cover.

‘Ideally earnings cover needs to be around that 2.0 times mark to offer a margin of safety to dividend payments,’ he says. ‘Should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.’ 

He adds: ‘With the average cover across the 10 highest yielding stocks in the FTSE 100 reaching 1.42 times. Investors need to consider whether these juicy looking dividend yields are sustainable.’

Dividend cover explained 

This is considered a key metric to assess whether a company is in a healthy position to distribute dividends. It is calculated by dividing earnings per share (EPS) by the dividend per share (DPS).

-Four warning signs a dividend cut is on the cards

As a rule of thumb, a low dividend cover score - around one times or lower - suggests dividends are vulnerable, as the company is using most if not all of its profits to fund the dividend. A figure of two or more is viewed as comfortable because it is a sign the business is not over distributing.

Those firms that do hand back more cash than they can afford risk damaging their longer-term growth prospects through lack of investment in the business.

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