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

We update the numbers to show the 10 highest-yielding shares in the FTSE 100 at the start of April. 

The FTSE 100 is expected to hand back a record amount of dividends to investors this year, according to AJ Bell’s latest Dividend Dashboard.

According to the AJ Bell’s first quarter report, the blue chip stock index is expected to see dividend payments grow by a total of 5.8% in 2019. That would bring the total amount paid out by the index to a record £92.2 billion, surpassing the previous record set last year, of just under £90 billion.

This strong dividend growth, combined with recent market volatility depressing share prices, brings the expected FTSE 100 yield for 2019 to 4.7 per cent.

AJ Bell also flags up the possibility of further special dividends noting that in 2018, 12 FTSE 100 firms made special dividends worth a collective £6 billion, boosting investor’s dividend income by some 7%. 

 

Dividend cover for the index is 1.68 times, a slight fall from mid-October when it stood at 1.74 times (the last time we updated this article). As a rule of thumb, shares with a dividend cover score of above 2 are considered reliable dividend payers.

Which FTSE 100 firms provide the highest yield?

Of the 10 highest yielding shares in the FTSE 100 two homebuilders, Persimmon and Taylor Wimpey, stand above the rest. Persimmon offers a yield of 10.5% and Taylor Wimpey 10.1%.

The appearance of these housebuilders at the top can be taken two ways. On the one hand some investors view the yields as highly attractive and argue the sector’s sluggish share price performance of late due to Brexit uncertainty has been overdone.

Alternately, the high yields could be interpreted as resulting investor scepticism about the future of the industry as Help to Buy approaches its end. Both have dividend cover way below the average.

Also included in the top 10 is TUI. The travel agent’s high yield is the result of its share price declining by over 30% during the first quarter of 2019, making it the index’s worst performer of that period.  Its dividend cover sits at 1.59x, above the average of the top 10 yielding shares.

Vodafone and Centrica, both of which are on yields above 9%, currently have dividend covers below 1.0x, meaning they have to borrow to fill the gap between payouts and earnings. After two dividend cuts in the past six years, Centrica’s chief executive has attempted to convince investors that he won’t be introducing another cut.

The healthiest dividend cover among the top 10 belongs to Aviva, at 1.84 times.

 

Why does dividend cover matter?

A key indicator of dividend sustainability is dividend cover. This is considered an important metric in assessing whether a company is in a healthy position to distribute the level of dividends it proposes to. The metric is calculated by dividing earnings per share by dividend per share.

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

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