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Are these the best yielding dividend stocks in the UK?

Dividend-paying companies mean a reliable source of returns, and often represent future growth prospects for investors. We list some of the UK’s top dividend stocks with high dividend yields and how you can buy them.

Trader Source: Bloomberg

Best UK dividend yielding shares to watch on the FTSE 100

  1. M&G
  2. Imperial Brands
  3. British American Tobacco
  4. Rio Tinto
  5. Phoenix Group

Note that these stocks have not been chosen as the largest dividend providers alone, but rather based on various factors including market cap, future growth prospects and latest results.

M&G – estimated dividend yield: Up to 8.9%

  • Most recent dividend: 12.2p (second interim dividend)
  • Latest dividend payment date: 29th September 2022

Savings and investment provider M&G Group Limited says it has made a “solid start” to its target to generate £2.5 billion in operating capital by 2024, despite posting lower profits for the half-year. Chief executive John Foley said at the half-year results in August that improved client flows demonstrated that the company’s operations were “resilient”, despite volatility in the equity markets.

“The turnaround in flows builds on the progress we made in 2021,” he told investors. “In only 12 months, we have reversed our position from being £2 billion in net client outflows, to achieving £1.2 billion in net client inflows excluding Heritage.

“Importantly, wholesale asset management achieved net client inflows for the first time since 2018 totaling £0.8 billion.” However, operating profits fell to £182 million from £327 million in the same period in 2021.

Meanwhile, the company is busy investing in its wealth arm, acquiring Continuum Financial Services, as well as launching PruFund Planet on its digital platform. At £433 million, operating capital generation also increased by 40% on the previous year, while the Solvency II coverage ratio remains strong at 214%. The shares went ex-dividend on 18th August 2022 and the latest payment date was 29th September.

Shares in the asset manager were hit late last year, following new Chancellor Kwasi Kwarteng’s mini-budget, with the stock down 17%. Investors were concerned that with the devaluation of the pound and long-term interest rate hikes, pension funds would struggle with liquidity issues. However, analysts said the issues were “likely to be muted” and the shares have since made a recovery.

Imperial Brands – estimated dividend yield: 6.96%

  • Most recent dividend: 49.32p (final dividend)
  • Latest dividend payment date: 31 March 2023

Tobacco companies such as Imperial Brands PLC and British American Tobacco often appear in the top dividend payer lists as they tend to be highly cash generative businesses.

Tobacco companies such as Imperial Brands PLC and British American Tobacco often appear in the top dividend payer lists as they tend to be highly cash generative businesses. While tobacco might seem like a market in decline, in its full-year results in November, Imperial said it had managed to grow share in five of its key ‘combustibles’ markets – traditional tobacco and cigarettes – by 35 basis points for the first time in more than five years, thanks to targeted investment.

Improved pricing helped offset volume declines in tobacco sales in the second half of the year, while the next generation vaping division grew revenues by 11%. A decline in volumes in Germany was offset by growth in the UK, US, Australia and Spain. The performance in the first half of the new year will be affected by Imperial’s withdrawal from Russia, while currency fluctuations will also reduce revenues by 5% to 6%. At the full-year dividends were increased by 1.5%.

British American Tobacco – estimated dividend yield: 7%

  • Most recent dividend: 217.8p (interim dividend)
  • Latest dividend payment date: 2 February 2023

British American Tobacco PLC (LSE) is unlikely to appear in any ESG fund (environmental, social, governance) investment portfolio anytime soon. However, as an income seeker’s stock it is highly desirable as the company throws of plenty of cash, with a cash rate conversion – the rate at which it converts profits to cash – of more than 90%.

In its recent trading update in December, BATs said it expects another year of operation cash conversion well above its 90% target. Meanwhile, its ‘Quantam’ cost-saving programme is expected to generate annualised savings of £1.5 billion by the end of 2022.

Even though the traditional tobacco business is on the wane, BATs remains highly profitable, with revenue growth of 2% to 4% expected for the full-year 2022. Like Imperial, it is also making headway in the vaping market. In its trading update BATS also said that it remains on track to deliver its target of £5 billion in revenues and profitability by 2025.

BATs tends to make dividend payments on a quarterly basis. In February the company announced an interim dividend of 217.8p per ordinary share of 25p, for the year ended 31 December 2021. This is payable in four equal quarterly instalments of 54.45p per ordinary share in May 2022, August 2022, November 2022 and February 2023.

Rio Tinto - estimated dividend yield 8.5%

  • Most recent dividend: 267c (interim dividend)
  • Latest dividend payment date: 22nd September 2022

Mining giant Rio Tinto’s shares currently yield 8.5% and the company is a solid dividend payer. At the half-year results in July, the company paid its second largest dividend payment total of $4.3 billion – a 50% pay-out. The miner throws off a lot of cash – it posted earnings before interest, tax, depreciation and amortisation of $15.6 billion at the half-year and delivered $7.1 billion in free cashflow.

Shares in the company are up 11% in the past 12 months to 6181p, not far off their five-year highs of 6553p, seen in February 2021. With a recession looming and concerns about an economic slowdown in China, it’s likely that metal prices could be hit. Prices for copper, zinc, aluminium and iron ore have already dipped so far this year. The mining giant also mines for lithium, which is a key component of electric car batteries. However, analysts at broker Credit Suisse think the shares could reach 7,200p. It may be worth taking some profits, but Rio shares remain an attractive option for income seekers.

Phoenix Group - estimated dividend yield 7.8%

  • Most recent dividend: 24.8p (interim dividend)
  • Latest dividend payment date: 10 May 2023

Phoenix Group boasts a generous dividend yield of 7.8% and increased the interim dividend by 2.5%. The life insurer recently acquired Sun Life of Canada UK, which has £10 billion of assets under management. The company posted increased pre-tax losses of £1.7 billion at the half-year (£876 million after tax) but this was largely due to adverse investment returns under IFRS accounting rules due to excess hedging of its balance sheet. Operating profits under IFRS came in at £570 million. Phoenix throws off large amounts of cash – reporting cash flow of £950 million during the period versus £872 million last year. In fact, the Sun Life UK acquisition was entirely self-funded. The acquisition is forecast to generate incremental long-term cash of £470 million, with 30% of this to be delivered within the first three years of ownership.

At its recent capital markets day in December, Phoenix said it expects to generate around £1.2 billion of incremental new business long-term cash generation – organically - in 2022. Meanwhile, it also said it is on track to deliver cash generation at the top end of its target range of £1.3 to £1.4 billion in the full-year.

Shares in the company are down 11% this year to 623.6p, partly due to the post-mini budget gilts crisis, which hit pension providers and life assurers. However, analysts at broker Deutsche Bank Aktiengesellschaft think they could reach 680p.

How to invest in best dividend stocks in the UK

You can invest in the UK’s top dividend stocks with us, from as little as £3 commission. Here’s how to get started with share dealing:

  1. Create an account with us: you’ll get access to over 13,000 stocks, 2000 ETFs, investment trusts and more
  2. Buy shares: once you’ve chosen your shares, purchase them on your share dealing account and monitor your investment
  3. 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

Trade the highest dividend-yielding stocks today – open an account with us or learn more about how to buy dividend stocks in the UK

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 buy 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 shouldn’t 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 or 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’s a risk that companies may pay out dividends from cash reserves rather than from profits.

A very high dividend yield, usually above 7%, could 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 divided by share price) x 100. Such drops prompt a sudden increase in the yield without increasing the amount paid out in dividends.

Companies that see 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% to 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’ll mean investors must look at the level of dividends, their growth (or otherwise) and how these are funded. In particular, the dividend coverage 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 aren’t being used to pay dividends. Below 1 is also a potential red flag, since it shows profits don’t 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 payout.

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:

  1. Use a market screener
  2. Analyse past dividend payments
  3. Learn more about the company

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 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 coverage ratio to determine the health of a company’s dividends.

Learn more about the company

Dividends are affected by several factors, so 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.

Read more about fundamental analysis

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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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