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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

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Best UK dividend yielding shares to watch on the FTSE 100

  1. M&G
  2. Imperial Brands
  3. British American Tobacco
  4. Glencore
  5. Aviva

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 10.59%

  • Most recent dividend: 13.4p
  • Latest dividend payment date: 3 November 2023

Savings and investment provider M&G Group Limited says it has made a “solid start” towards its target of generating operating capital of £2.5 billion by the end of 2024.

"M&G started the year building on our strong momentum from 2022,” group chief executive Andrea Rossi told investors at the first-quarter trading update in June. “At the full-year results we identified three priorities for the Group: maintain financial strength through capital discipline, simplify the business, and deliver profitable growth focusing on Asset Management and Wealth. I am pleased to say we have made good progress on each of those fronts and are on track to deliver on our ambitious targets.”

Rossi says he is "particularly encouraged” by the £1.0 billion net client inflows seen in M&G’s wholesale asset management division in just three months. “Thanks to this success, we more than offset the expected redemptions from institutional clients [driven by the negative impact of Liz Truss’ Mini-Budget] and drove inflows into high-margin propositions,” he says. Much of this growth has come from the UK market.

Meanwhile, the company continues to work on its “transformation” programme to unlock growth and deliver £200 million of cost savings. It has also returned almost £1 billion to shareholders through dividend payments and share buyback schemes. The shareholder Solvency II coverage ratio remained solid at 200%. M&G’s half-year results are due on 20 September.

Imperial Brands – estimated dividend yield: 8%

  • Most recent dividend: 21.59p (interim dividend)
  • Latest dividend payment date: 29 September 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. While tobacco might seem like a market in decline, Imperial is still managing to grow market share in many of its markets and pricing there remains robust. The company is also busy investing in its next generation vaping products.

At the half-year results in May, the company said that operating profits rose 28% to £1.5 billion (from £1.2 billion last year), thanks to the non-repeat of the cost of its exit last year from Russia. Meanwhile, revenues increased marginally by 0.3% to £15.4 billion (£15.3 billion). Volume declines in the UK and Germany were offset by a stronger performance in its US, Australia and Spanish markets. Imperial also said it was on track to complete its £1 billion capital return to shareholders in the second-half.

However, net debt at the company rose during the period due to the increase in its investment in its new generation vaping products. After an initial good run this year, the shares have dipped by 6% and are worth buying.

British American Tobacco – estimated dividend yield: 8.9%

  • Most recent dividend: 230.9p (paid quarterly)
  • Latest dividend payment date: 3 November 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%.

The shares have been hit for six this year due to BATs being fined $635 million for selling $30 million of cigarettes to the Singaporean Embassy in North Korea – breaking US sanctions – and processing $250 million from sanctioned North Korean banks through US institutions. The shocking scandal ended in the exit of previous chief executive Jack Bowles from the company and former finance director Tadeu Marroco taking over the reins as CEO. As such, the shares are down 24% this year and are likely to take some time to recover from the debacle.

However, its financial results continue to be strong, with half-year revenues up 4.4% to £13.4 billion (2.6% at constant currency rates), while sales from its new vaping products rose 27%. These next generation products now account for 17% of BATs’ group revenues. Cash conversion rates remain in excess of 90%. Profitability from its vaping products is now expected a year earlier, in 2024.

While the share price slide is disappointing for investors, the dip offers a decent entry point for new investors.

Glencore - estimated dividend yield 8%

  • Most recent dividend: 22c
  • Latest dividend payment date: 22 September 2023

Glencore shares have been hit by the economic slowdown in China and the fall in metals and commodity prices globally. The shares are down 7% for the year to 432p and have been volatile. Half-year revenues fell by 20% to $107.4 billion ($135 billion in 2022), while net income shrank by 62% to $4.6 billion ($12.1 billion in 2022). Falling energy prices and, in particular, coal prices have hit profits, while costs have risen due to inflationary pressures. The company calls this a “normalisation” due to the extreme energy price levels last year.

However, the shares trade on a PE of just 7 and generous pay-outs to shareholders will continue. A share buyback programme of $1.2 billion has been announced, while a special dividend payment of $1 billion is due for investors next year. Glencore received $1 billion in cash, along with $3 billion in shares from Bunge the sale of its share in Viterra to Bunge.

As a cyclical stock, the shares can be volatile but could recover over time. Analysts at broker Deutsche Bank recently reiterated their buy recommendation on the stock with a price target of 560p.

Aviva - estimated dividend yield 8.48%

  • Most recent dividend: 11.1p
  • Latest dividend payment date: 5 October 2023

Shares in Aviva currently yield 8.48%, with obvious attractions for income seekers. The insurance giant recently posted impressive results, with operating profits up 8% for the first six months of the year to £716 million (£661 million in the same period in 2022). What’s more, it said that full-year results should be better than expected. General insurance gross premiums increased by 12% to £5.3 billion (against £4.7 billion last year), while retirement sales rose by 17% to £3.2 billion. In the UK and Ireland, general insurance premium sales increased by 13% over the period.

Aviva also increased dividend payments by a bumper 8% to 11.1p and, while the insurer was tight-lipped about further returns of cash to shareholders, it told investors that it expects to make further regular “capital returns” in the future. Aviva returned £300 million to shareholders earlier in 2023 and remains well-funded, with operating profits forecast to increase at a rate of between 5% and 7% in 2023 from £1.34 billion last year. The insurer is on track to meet its own internal cash generation targets and is trimming £750 million annual costs.

Analysts at broker JP Morgan Chase recently cut their share price target from 545p but still think the shares could reach 535p and maintain their overweight recommendation.

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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