Are these the best yielding dividend stocks in the UK?

Best UK dividend yielding shares to watch on the FTSE 100

What are some of the best dividend-yielding shares worth watching on the FTSE 100? Here are some of the shares we think are worth a closer look. Note that these stocks have not been chosen as the largest dividend providers alone, but for recent market news. Past performance is not a guide to future performance. Always do your own research.

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

M&G – estimated dividend yield: Up to 9%

• Most recent dividend: 19.7p
• Latest dividend payment date: 9 May 2024

Insurer and investment manager M&G Group Limited posted strong full year results in March, with adjusted operating profit before tax up 28% to £797 million (from £635 million in 2022). This was thanks to resilience in its asset management business and an improved performance by its life, wealth and corporate centre. Operating capital generation increased by 21% to £996 million from £821 million last year, while net client flows, excluding heritage, increased to £1.1 billion (from £200 million in 2022).

Indeed, between 2022 and 2023 M&G managed to generate £1.8 billion in operating capital and management says that, as such, the insurer is well on track to meet its three-year target of generating £2.5 billion by the end of the year. The shareholder Solvency II coverage ratio – used to measure the resilience of insurance firms – also improved to 203% from 199% last year. Meanwhile, M&G managed to take £73 million in costs out of the business last year. The shares are up 9% this year and currently yield 9%.

Imperial Brands – estimated dividend yield: 8%

• Most recent dividend: 146.8p
• Latest dividend payment date: 28 March 2024

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 full year results in November last year, Imperial Brands said revenues had dipped slightly to £32.5 billion from £32.6 billion in the same period last year. However, pre-tax profits increased to £3.1 billion from £2.6 billion in 2022, boosted by improved pricing in its tobacco markets and its five-year efficiency programme. Imperial enjoyed market share gains in three out of five of its markets – the US, Australia and Spain. Meanwhile, it is also returning £2.4 billion to investors in 2024, while its next generation vaping products grew revenues by 26%. The shares are down 8% this year but could be worth watching.

British American Tobacco – estimated dividend yield: up to 10%

• Most recent dividend: 235.52p (paid quarterly)
• Latest dividend payment date: 2 May 2024

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

The shares have been under pressure 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 scandal ended in previous chief executive Jack Bowles leaving the company and former finance director Tadeu Marroco becoming CEO. As such, the shares are down 16% this year and are likely to take some time to recover.

The company also posted a £15.8 million loss for 2023 (from a £10 million profit last year) due to £22 billion in non-cash impairment charges relating to its US brands and other goodwill impairment charges relating to its US, South African and Peruvian businesses. Nevertheless, stripping out these charges, adjusted operating profits rose by 3.1% at constant currency rates. In AME (Africa and the Middle East) adjusted profit from operations increased by 5.9%, thanks to improved profitability in its new vapes category. Cash flow also continues to be strong, with cash conversion rates at around 100%. BATs expects to generate £40 billion in cash flow over the next five years, while it is busy moving customers onto its next generation vapes products.

Vodafone - estimated dividend yield 11%

• Most recent dividend: 7.71p
• Latest dividend payment date: 2 February 2024

Shares in Vodafone have dipped by around a quarter this year and have put in a lacklustre performance for some time. However, as an income stock the mobile phone giant currently yields an impressive 11%. Recently, new chief executive Margherita Della Valle who replaced Nick Read last year has been overhauling the company’s portfolio, selling off Vodafone Italia to Swisscom for €8 billion and disposing of Vodafone Spain.

However, a major issue is the likely Competition and Markets Authority investigation into its long-proposed merger with Three, which is currently owned by CK Hutchinson. Regulators are worried that the tie-up could reduce choice and increase prices for customers in the UK market.

Nevertheless, Della Valle's much-needed plan to restructure Vodafone's business portfolio could make the shares worth watching, along with the planned €4 billion return of capital to shareholders.

Phoenix Group - estimated dividend yield up to 9.6%

• Most recent dividend: 52.65p
• Latest dividend payment date: 22 May 2024

Pensions specialist Phoenix Group recently unveiled an impressive trading statement, with new business net fund flow almost doubling to £70 billion. This was due to a strong performance at its Standard Life branded Pensions, Savings and Retirement Solutions division. The value of bulk purchase annuity premiums also rose to £6 billion in 2023 (up from £4.8 billion in 2022), while workplace pension net fund flows doubled to £4.5 billion as the company landed the transfer of one of the UK’s biggest workplace pension schemes.

Meanwhile, Phoenix says that it has already delivered its 2025 target of generating £1.5 billion in new business long term cash. Shares in the pensions provider, which are up just under 1% this year, currently boast a dividend yield of almost 10%.

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

Take your position on 17,000+ shares with the UK’s No.1 platform.* Learn more about trading or investing in shares with us, or open an account to get started today.
* Best trading platform as awarded at the ADVFN International Financial Awards 2022