Highest yielding dividend stocks in the UK
High-yielding dividend stocks in the UK are not hard to find. In fact, the top five dividend payers — Shell, HSBC, BP, British American Tobacco and GSK — account for almost half of all the FTSE 100’s income. Here’s our rundown.
High dividend stocks are extremely popular among investors who prioritise long-term income over short-term capital gains, and the highest yielding shares in the FTSE 100 are particularly attractive to investors who have struggled to find inflation-beating returns elsewhere on the stock market.
But market fluctuations can cause the top-paying dividend stocks to shift over time. This means that income investors need to keep reviewing their stocks portfolio and income funds to ensure that they are still creating good value.
How to identify high-yield shares
- Review the company’s dividend history
When it comes to share price, past performance is no guarantee of future earnings. But dividend payouts are slightly different. By taking a look at a company’s previous dividend habits, prospective investors can get a sense of how dividend payments are prioritised by the company. Some firms — such as Royal Dutch Shell — are so committed to maintaining a particular dividend yield that they will dip into their own cash reserves or offer scrip dividend options in order to keep their income investors. Others are happy to raid the dividend bank to fund acquisitions, patent approvals, fines, or research and development.
If dividend yields appear to be falling over time, ask why. Is the firm scaling up, paving the way for higher payouts in the future? Or do its earnings reflect a generally poor growth strategy?
Similarly, high dividends and low earnings are a warning sign. This generally means that the firm is spending too much on dividends, making its future growth less likely. If there’s a downturn that further hits its earnings, it may have to cut its dividend. You may hear the expression ‘dividend cover’. Put simply, that’s the ratio of a company's net profit to the total sum allotted in dividends to ordinary shareholders. The higher the ratio, the better.
- Think long term
Dividend windfalls are largely a thing of the past. Now, the most popular dividend stocks in the UK tend to deliver steady yields over the long term. If you are new to income investing, it is best to target sustainable income stocks. Look for steady earners that match the typical yield of the FTSE 100 (currently 4.1%) rather than firms that allow their yields to fluctuate wildly.
Most importantly, seek out evidence that the company in question is able to maintain or even increase its dividend payments over time. This shows that dividend yield is a priority of the firm, and that it values its income investors.
- Read up
The more you know about your dividend stocks, the better investor you will be. Dividend values are affected by a number of factors — a change in senior management, a buy out or prospective acquisition, and of course, the company’s share price. By reading up on the financial press, you can get a sense of the company’s overall financial health, and how this might impact on your income opportunities.
The value of a company’s dividend payments will generally be decided months before the figures are announced. Dividend yields can be easily set based on expected revenue, stock price activity and upcoming business or changes in the firm’s structure. Any disruption of this kind can be priced into the dividend announcements, so income investors have time to get used to any forthcoming payment reductions. CEOs will usually use the end of year financial report to signal any changes to dividend payments in the near future, or to hint at events (e.g. acquisitions) which may impact on dividend values further down the line.
By arming yourself with as much insight as possible, you can make smarter decisions about your stock portfolio.
- Go digital
Online investment platforms make it easy to compare high-yield dividend stocks, and to find the individual shares or income funds that work with your individual risk profile. However, to really ensure value it’s best not to simply filter your search by high-yielding stocks. Instead, screen for companies with a proven track record of being able to deliver steady, market-matching or market-beating dividends over at least five years.
You can use IG’s market screener to hunt out the best dividend yields.
Finally, diversification is key in any investment portfolio. No dividend outlook is guaranteed, no matter how steady the company appears to be. Rather than relying on one or two FTSE 100 stocks to maintain your dividend payments, spread your money across a variety of tried and tested income stocks.
For added diversity, make sure you are invested across several different sectors. For instance, while oil and gas companies tend to fare well in terms of dividend yield, they are all vulnerable to oil price crashes and environmental hazards. Balance out oil and gas investments with investments in the financial market, pharmaceuticals or even tobacco, and you will reduce your risk substantially.
Best dividend stocks UK (as of August 2018)
Dividend yield: 5.79%
The international banking group last cut its dividends in 2009. It has recently undergone an extensive restructuring, appointing a new CEO and renewing its focus on the Asian markets. This has led most analysts to predict that there is plenty of scope for dividend growth in the future.
Royal Dutch Shell
Dividend yield: 5.71%
The oil giant hasn’t reduced its dividend payments since World War Two, despite occasional volatility and share price corrections. The dividend yield has been comfortably above 5% since 2014, and the firm has shown a willingness to offer scrip dividends to shareholders to supplement payments when necessary.
Dividend yield: 5.56%
The British oil and gas behemoth beat analyst expectations when they released their full-year results earlier this year. This has restored faith in the scandal-hit firm, sending its stock price shooting up, and keeping its dividend yield comfortably above 5%.
British American Tobacco
Dividend yield: 4.99%
Despite falling global cigarette sales, British American Tobacco has managed to increase its dividend yield year on year through smart management and value-adding mergers and acquisitions (M&As). Last year’s acquisition of Reynolds America turned British American Tobacco into the world’s largest tobacco company and pushed its dividend yield to almost 5% for the first time since 2010.
Dividend yield: 4.99%
The pharmaceutical giant has either maintained or increased its dividend yield consistently over the past 20 years, with a current yield of almost 5%. Despite recent fears of a dividend cut, the firm has promised to maintain its full-year dividend payments for 2018, although a rumoured takeover of Pfizer’s consumer business could force the company to reduce dividends to free up new funding. Even if the dividend payments do drop slightly next year, analysts tend to take a long view on GSK’s income prospects.