Are these the best FTSE 100 dividend stocks to watch in January 2024?

The FTSE 100 has experienced somewhat of a volatile 2023 — falling to a recent low of 7,291 points on 27 October before recovering to 7,686 points today, up 1.75% year-to-date, and that excludes the £78.7 billion in dividends expected to be paid out this year.

Of course, this volatility reflects wider macroeconomic concerns; while predictions are ten a penny, analysts are seemingly on the fence over whether the UK will enter recession, see a soft landing, or experience growth in 2024.

But yesterday, the US Federal Reserve kept rates steady, maintaining the target range of between 5.25% and 5.5% — and policymakers have now forecast three rate cuts in 2024. While the S&P 500 responded positively, it’s worth noting that rate cuts do not always correspond with increased growth. This matters to the FTSE 100, because the UK’s largest companies derive the majority of their revenue from overseas — and the Bank of England has also voted to maintain the current 5.25% base rate.

On the fiscal side, some analysts consider a spring election a distinct possibility — Capital Economics consider the Chancellor may have an extra £11 billion for tax cuts as a result of falling rates, but UK GDP fell by 0.3% in October and significant fiscal movement may not be possible after the recent NI cut.

This leaves 2024 perhaps as uncertain as 2023, both for the FTSE 100, and for the currently highest yielding stocks on the index. As an example, housebuilder Persimmon was consistently one of the highest-yielding FTSE 100 stocks for several years and has now been demoted to the FTSE 250 in the face of the weaker housing market. Past performance is not an indicator of future returns.

Top FTSE 100 dividend stocks to watch

Vodafone (LON: VOD)

Vodafone shares have fallen by 58% over the past five years, leaving the FTSE 100 telecoms operator with a double-digit dividend yield alongside a price-to-earnings ratio of just 2. While this may appear to be remarkable value at first glance, it’s worth noting this figure is based on asset sales in its last financial year which included the €8.61 billion generated from the sale of Vantage Towers.

In recent half-year results, CEO Margherita Della Valle enthused that ‘during the first half of the year, we have delivered improved revenue growth in nearly all of our markets and have returned to growth in Germany in the second quarter.’

German growth could be particularly encouraging because Vodafone relies on the country for a significant chunk of its revenue — and 2021 legislation saw housing associations banned from bundling TV services with rental contracts, hurting Vodafone’s prospects.

However, while the dividend remained unchanged, net debt increased by €2.9 billion to €36.2 billion, raising questions over the dividend’s sustainability.

Dividend Yield: 11.9%

Phoenix Group (LON: PHNX)

This popular FTSE 100 insurance company may be tempting to value investors eyeing its sharp recovery since mid-October. For context, the company paid out 50.8p to investors last year — and the average analyst expectation is that this will increase to 52.6p in 2023.

In H1 results, the FTSE 100 business reported cash generation of £898 million, above analyst predictions, allowing the company to boost its interim dividend by 5% to 26p per share.

Given that Phoenix Group is now on track to generate £1.3 billion to £1.4 billion of cash generation for the full year, the dividend could now be safe — especially with its solvency II ratio of 180% at the top of the 140-180% management target.

However, there are risks. Its bonds are likely falling sharply in value as rates continue to rise, and Phoenix also has a debt pile to manage. JP Morgan analysts have cut their price target from 655p to just 430p, and downgraded Phoenix to underweight, arguing that ‘the stock has too much debt leverage relative to peers, which creates numerous capital and growth risks in the long term.’

Dividend Yield: 10.5%

British American Tobacco (LON: BATS)

British American Tobacco is one of the world’s largest tobacco companies, boasting a brand portfolio including Lucky Strike, Dunhill, and Pall Mall. It’s also highly defensive given the addictive nature of nicotine.

However, the company continues to face regulatory problems; the UK is planning to ban single use vapes and both the government and the opposition have confirmed support for a phased ban of traditional tobacco products. It also faces the wider fall in smoking worldwide, and a large debt pile as rates rise.

However, the 29% share price dip year-to-date may be attractive to income investors. The company is investing heavily in alternative products including vapes, though most profits are still derived from traditional products. In half-year results, overall revenue rose by 4.4% driven by these ‘new categories,’ whose revenue rose by 26.6%.

However, the company recently wrote off £25 billion in value due to falling outlook for its brands as cigarette sales struggle in the US.

Dividend Yield: 10.1%

M&G (LON: MNG)

M&G is becoming a well-known FTSE 100 dividend share. The company plans to generate operating capital amounting to £2.5 billion by the end of 2024 and has now achieved more than 50% of this three-year target, 18 months in.

Moreover, its shareholder Solvency II Coverage ratio remains at the top end of the target range at 199%, with no defaults in the first half of the year.

And in half-year results, M&G increased its interim dividend by 5% to 6.5p per share. For context, it saw positive net client inflows of £700 million — remaining positive into a third consecutive year. M&G also saw operating capital generation rise by 17% year-over-year to £505 million, driving adjusted operating profit 31% higher to £390 million.

CEO Andrea Rossi enthuses that the results ‘demonstrate the underlying strength of our business model, the resilience of our balance sheet… we have made progress against all three pillars of the strategy that we launched in March.’

Dividend Yield: 9.2%

Imperial Brands (LON: IMB)

Imperial Brands is the second FTSE 100 tobacco stock — and faces many of the same issues as BATS: regulatory clampdowns and changing consumer habits.

However in recent results, BATS saw adjusted operating profit grow in line with its five year plan, including 10 basis points aggregate market share growth in its top-five priority combustible tobacco markets.

Further, next generation product net revenue rose by 26% — and increased by a whopping 40% in Europe. Accordingly, the dividend was hiked by 4% alongside a 10% increase in share buybacks, leaving investors with total FY24 returns of £2.4 billion.

Dividend Yield: 8.2%

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*Based on revenue excluding FX (published financial statements, October 2021).