Highest-yielding dividend stocks to watch in the UK
Dividend-paying stocks are a popular choice among investors. Here, you’ll learn everything you need to know about some of the UK’s top dividend stocks, in terms of highest yields, including how you can buy them.
*These estimates were calculated by our analysts using the most recent dividend per share and share price for each company as of 3 June 2021.
How to invest in the UK’s best dividend stocks
You can invest in the UK’s best dividend stocks with us, from as little as £3 commission.1 Here’s how to get started with share dealing:
- Create an account with us: you’ll get access to over 12,000 stocks, 2000 ETFs and also investment trusts
- Buy shares: once you’ve chosen your shares, buy them on your share dealing account and monitor your investment
- You can also trade shares using spread bets or CFDs, which means you won’t own the underlying asset, but you can speculate on upward or downward share price movements
M&G – estimated yield: 7.4%
M&G, as part of the savings and asset management industry, enjoys relatively stable revenue from charging a fee on assets under administration. It is unlikely that management will need to reduce the dividend in the near term: however, its scope to increase it is capped.
- M&G’s estimated yield is currently around 7.4%, its most recent interim dividend of 12.23p per share having been paid on 28 April 2021. This amount is in line with the M&G’s policy of a stable increasing dividend
- The payment date for M&G’s next interim dividend is expected to be 29 September 2021, with an ex-dividend date of 19 August 2021 for an as-of-yet undisclosed amount
- M&G’s share price had dropped more than 20% within the last year, with earnings per share (EPS) down 28% in 2020. However, its current share price of 246.80p indicates an expected dividend yield of approximately 7.4% if the value of distributions remains unchanged
- M&G’s dividend coverage ratio is a healthy 3.6x, much improved since the previous figure around 1.2x. This means the dividend is likely coming out of retained earnings, a potential red flag for the sustainability of the company going forward
- One reason for this may be that it’s been more than a year since the demerger from Prudential. In 2019, significant cash flows went to former parent company Prudential, which has since ceased.
- In fact, in its 2020 full year statement in March, M&G stated that total cash and liquid assets have remained stable with cash remittances of £737 million (as opposed to £477 million in 2019), satisfactorily covering the £562 million cash dividend payments to equity holders and interest paid on structural borrowings of £189 million (huge progress from the £22 million paid in 2019).
- Earlier in 2021, it announced that it will make dividend payments directly into shareholders’ bank accounts for added convenience amid the Covid-19 pandemic
Imperial Brands – estimated yield: 8.8%
Imperial Brands (IMB) – formerly known as Imperial Tobacco Group – is a UK-based cigarette and tobacco company, headquartered in Bristol. The company is listed on the London Stock Exchange (LSE) under the IMB ticker. The company was founded in its original form in 1901 and it specialises in cigarettes, cigars, fine-cut rolling tobacco, snuff tobacco and rolling papers. IMB pays dividends quarterly, with its next dividend payment date being 30 June 2021.
- IMB has an estimated yield of around 8.8% based on latest forecast earnings
- In its May 2021 results, IMB announced a 1% increase for the interim dividend per share for the year
- The dividend coverage ratio for 2021 is estimated at 1.54, up from 1.49 earlier this year and reassuringly higher than 2020’s 1.15x. This means the dividend is coming out of the company’s net income, not from retained earnings, often a good sign for current earnings
- IMB’s current return on equity (ROE) is estimated at approximately 28%
- However, IMB’s current debt/equity ratio, at around 2.12, is significantly high and suggests that the company is highly leveraged – although still within rating agency Fitch’s February guidance of 2x to 2.5x. An interest coverage ratio of above 8x means IMB is in a comfortable position to service this debt
Diversified Energy Company (DEC) – Estimated yield: 10.7%
The Diversified Energy Company (DEC), formerly the Diversified Gas & Oil Company, is a natural gas producer that acquired the assets of EQT and Carbon Energy in 2020, funded by a mix of debt and equity. DEC pays a quarterly dividend, which may be attractive for investors seeking regular income and, unlike many of its peers, awarded two dividend increases in 2020.
- Based on its latest interim payment of 3p, its current share price of around 106.20p gives an estimated dividend yield of approximately 10.7%
- DEC’s next dividend payment is also expected to be 3p, with an ex-dividend date of 2 September 2021 and a payment date of 24 September 2021
- Current dividend coverage ratio is low, sitting at around 1.4
- A key risk to earnings is the price of gas and foreign exchange fluctuations. To mitigate this risk, the company have hedged 90% of 2021 volumes at a price of $2.67/MMbtu (metric million British thermal units) and 2022 volumes are hedged at $2.76/MMbtu
Direct Line Group – estimated yield: 8.2%
Direct Line Group (DLG) is a UK insurance group listed on the LSE and founded in 2012 following the divestment of The Royal Bank of Scotland Group's insurance division, through an initial public offering. After initial concerns over the Covid-19 pandemic, DLG restated its dividend having confirming the pandemic would have little impact on its ability to generate cash.
- DLG’s dividend policy states that one-third of the annual dividend was paid in the third quarter of FY2021 as an interim dividend and two-thirds be paid as a final dividend in the second quarter of FY 2022
- The second quarter (Q2) payment was a final dividend of 14.7p on 20 May 2021, alongside a special interim dividend of 14.4p per share reflecting a full catch-up of the cancelled 2019 final dividend
- This indicates an estimated dividend yield of 8.2% based on the current share price of around 300.8p – a generous yield
- Even more encouraging is the recovering dividend coverage ratio, which has risen from 2.1x to approximately 3.51x since the beginning of the year
- However, analysts expect EPS could fall below 0.26p in 2021, which would reduce the coverage ratio
- The next interim dividend payment is expected to be paid on 3 September 2021 for an as-of-yet undisclosed amount
Evraz – estimated yield: 6.2%
Evraz (EVR) is a global steel producer. Roman Abramovich, owner of Chelsea Football Club, is the largest shareholder with 30% shares. EVR have paid a dividend for the previous three years after a four-year suspension of returning cash to shareholders. With an April 2021 dividend payment of 22p per share, significantly lower than the 29p paid out at the same time last year, earnings are not expected to rise significantly for the rest of 2021 but anticipated higher steel prices may help improve the outlook for revenue and therefore the possibility of higher dividends.
- EVR’s latest dividend payment is an interim payment of £0.14 with the payment date set for 25 June 2021
- Evraz has a current expected dividend yield of approximately 11.4%
- EVR’s most recent payment was on 7 April 2021
- Of concern is Evraz’s dividend coverage ratio, which was 0.48x in 2020 and is approximately 0.97 currently – a slight improvement. However, this means dividends are coming out of the company’s retained earnings rather than current earnings, suggesting the dividend may not be sustainable for the company going forward
- An important consideration is whether a company has been able to continuously increase or at least maintain its dividend per share. EVR cut its dividend by a further 20% in 2020 to $872 million paid out in dividends, after a 30% cut in 2019 due to a steep decline in earnings. With a latest interim dividend payout of $291.7 million in June, it remains to be seen whether dividend per share figures will turn around
*A note to readers: These estimates were calculated by analysts and our in-house experts using the most recent dividend per share and share price for each company as of 4 March 2021. Dividend yields and other corresponding figures, such as dividend coverage ratios, are dynamic and change as often as share prices do. The figures represented in this article, accurate as of 4 June 2021, are offered as potential guidance to traders and should not be constituted as advice or interpreted as current amounts.
Dividend stock investing strategy: what you need to know
Dividends are often viewed as a crucial element of a strategy, providing a regular stream of income or used to purchase more shares in a company (a process known as reinvesting). The difference in an investment’s return based on capital appreciation only can be drastically different from that including the returns from dividends.
However, dividends should not be the sole reason for investing in a company, but rather a bonus element to the key requirement of selecting a company with strong fundamentals and or a bullish price trend. It’s also important not to pick companies based on dividend yield alone, since dividends can be reduced in size as well as increased.
Usually a well-managed company will look to pay dividends as a way of demonstrating its financial strength and attractiveness for investors, but there is a risk that companies may pay out dividends from cash reserves rather than from profits.
A very high dividend yield, usually above 7%, can be a red flag for investors. Usually dividend yields increase sharply when a share price drops, since the dividend yield is calculated as: (dividend per share/share price) x 100. Such drops prompt a sudden increase in the yield without increasing the amount paid out in dividends. Companies that see such sharp increases in yields are often tempted to cut the dividend as a result, since the yield can still be kept to an attractive level (2%-3%) but money can be saved in terms of reduced dividend pay-outs.
Choosing dividend-paying companies for a potential investment thus requires an extra level of work beyond looking at the financial statements or examining the price chart. It will mean investors must look at the level of dividends, their growth (or otherwise) and how these are funded. In particular, the dividend cover ratio is key.
This is calculated by dividing net profits by the dividend to produce a ratio. Above 1 signals that the dividend is at least covered fully by profits and that existing cash reserves are not being used to pay dividends. Below 1 is a red flag, since it shows profits do not cover the pay-out and thus cash reserves are employed to maintain the dividend. This runs the risk of a dividend cut or cancellation of the entire pay-out.
How to identify the UK’s best dividend stocks
There are a few steps you can follow to identify the UK’s best dividend stocks:
Use a market screener
You can use online resources such as a market screener to look for companies with a proven track record of delivering dividends. A screener also makes it easy to compare high-yield dividend stocks against each other. This way, you can choose the stocks that best suit your risk profile.
Analyse past dividend payments
By analysing past dividend payments, you can get a sense of how the company prioritises them. Some companies may be so committed that they dip into cash reserves in order to keep investors satisfied, while others do the opposite and use dividend funds to pay for day-to-day activities.
If past dividend payments were very high and earnings were low, it could be a red flag. That’s because a company that spends too much on dividends maybe harming future growth. You can use ratios such as the dividend yield and relative dividend yield to determine the health of a company’s dividends.
Learn more about the company
Dividends are affected by several factors. Therefore, it’s important to learn as much about the company as possible. This includes share price activity, fundamentals and all corporate actions. These factors will help you establish a company’s overall health, as well as the prospects for dividend payments.
1Our best share dealing commissions apply to clients who opened three or more positions on their share dealing account in the previous month.
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