Strong dividend growth, combined with recent market volatility, brought the expected FTSE 100 yield for 2018 to 4.3%.
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 third quarter report, the blue chip stock index is expected to see dividend payments grow by a total of 10% in 2018. That would bring the total amount paid out by the index to a record £89.8 billion, surpassing the previous record set last year, of just over £80 billion.
This strong dividend growth, combined with recent market volatility depressing share prices, brings the expected FTSE 100 yield for 2018 to 4.3 per cent.
Strong profits have also helped to improve the dividend cover of many firms. With profits forecast at £224.8 billion for the FTSE 100, the cover for the total £89.8 billion should be 1.74 times.
The current level of cover, at 1.74 times, is still below the ideal 2.0 mark for dividend cover. However, it marks an improvement, with the latest cover figure being the strongest since 2014, the last time cover managed to exceed the ideal 2.0 times ratio.
Which FTSE 100 firms provide the highest yield?
The 10 highest yielding shares in the FTSE 100 provide an average yield of 8.6%, with two firms, house builder Persimmon and miner Evraz, providing yields of at or over 10%.
Alongside Persimmon are a number of other housebuilders, with various pressures such as a flat housing market and changes to government policy depressing their share prices, pushing up yields.
Recent share price falls have also seen yields from Vodafone, SSE and Standard Life Aberdeen shoot up. However, all three have also seen their earnings cover reach riskily low levels. Vodafone, SSE and Standard Life Aberdeen have seen their dividend covers fall below 1.0 times, meaning they have to borrow to fill the gap between payouts and earnings.
The average dividend cover across the 10 highest yielding shares was also low, at just 1.13 times, placing the future stability of the highest yielders dividends at risk.
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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