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An income hunter’s look at the FTSE 100

Mark Carney’s announcement of a cut in UK interest rates, plus a raft of new monetary easing efforts, helped to push the cost of borrowing for the UK government to a fresh low. This drop in gilt yields is just one small part in the ongoing fall in payouts for holders of bonds. It is a further reminder that equities offer the best source of income for investors at the moment. 

All trading involves risk. Losses can exceed deposits.

This is a trend that has been in evidence for years now, in fact since the financial crisis. Global quantitative easing efforts, designed to provide liquidity and kick-start an economic recovery, have pushed investors into bonds, driving up the price and consequently sending yields lower. As a result, investors looking for income have been forced to buy equities as well to provide regular payments.

When looking at the FTSE 100, there are several ways to capture income in an effective way. The first is via an ETF, which in this case would be the iShares UK dividend ETF. This ETF invests in the top 50 dividend payers in the FTSE 350 index (excluding investment trusts), with top ten holdings in the likes of Aberdeen Asset Management, Shell, BP and HSBC.

The current yield of 5.8% is well in excess of the FTSE 100 as a whole (3.7% as of the end of July 2016), and the international focus of many of the names in the ETF means the fall in sterling will make these firms even more attractive. A weaker pound will help to benefit revenues when translated into sterling, boosting income and potentially leading to higher dividends at some companies. With a five-year dividend growth rate of 7.8%, the ETF looks to be an interesting way of finding income in the current financial climate.

The second way would be to pick out individual sectors and companies with strong yields. However, investors should remember that no share should ever be purchased just for the yield on offer. Dividends can be cut just as easily as they can be increased, and excessively high yields are usually a danger sign (remember, the yield moves inversely to price).

A way of providing some extra potential security on dividends would be to scan for earnings per share (EPS) and dividends per share (DPS), and then selecting those sectors where EPS was comfortably higher than DPS. For example, the energy sector of the FTSE 100 has a yield of 7.5%, and is expected to pay out 1.37p per share in dividends over the coming year. However, earnings per share for the same period are expected to be 1.13p, so payouts could be at risk of being cut to reduce this shortfall and cut back on cash burn.

The current list of dividends by sector is shown below:

Name P/E 12-month projected EPS (p) 12-month projected DPS (p) Dividend yield (%)
Consumer discretionary 19.94 1.32 0.6353 2.90
Consumer staples 27.84 2.11 1.2719 2.72
Energy 0.00 1.13 1.3798 7.50
Financials 17.89 0.55 0.3248 4.65
Healthcare 1.10k 2.72 1.2630 4.17
Industrials 24.51 1.04 0.4284 2.80
IT 60.78 0.34 0.1203 0.86
Materials 507.95 1.22 0.5311 3.42
Telecoms 13.7 0.16 0.1507 4.89
Utilities 19.75 0.68 0.5083 4.52


Checking dividends against EPS is a simple but effective way of seeing which sectors and companies have dividends that may be at risk of a cut. It is not a certainty, since firms may opt to leave dividends unchanged rather than lose a record of consistent increases to payouts, but it can flag up risks to an income strategy. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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