10 high yielding shares in the FTSE 100: how safe are their dividends?

FTSE 100 dividend yields look good - but dividend cover is dangerously thin

While dividend payouts from FTSE 100 listed companies are forecast to increase over the course of 2018, for many companies, dividend cover remains dangerously thin. 

According to AJ Bell’s Dividend Dashboard report, FTSE 100 companies are forecast to pay a total of £88.5 billion in dividends in 2018 - a 7 per cent increase on the final forecast payout for 2017.  

FTSE 100 companies are expected to yield 4.3 per cent, much higher than UK 10-year government bonds, yielding 1.2 per cent. This high yield may help support UK equities throughout 2018, despite concerns over the valuations becoming richer.  

Much of this growth in 2018 is expected to come from financials. After being out of favour for the past decade banks and other financial shares have started to make a comeback of late, and are expected to continue to do so in 2018. 

Financials are expected to provide a total of 23 per cent of dividend payments in 2018, followed closely by oil & gas explorers, providing 20 per cent of the total. 

Dividend payment concentration also remains high when it comes to individual shares on the FTSE 100. The top 10 dividend payers on their own are forecast to represent over half of the total dividend payouts in 2018. This, however, presents potential danger for investors due to dividend cover being noticeably thin.  

Shares with the highest dividend payout

How safe are the top 10 dividend payers?

While the high yields look enticing, dividend covers for the top 10 look concerningly low, at 1.37. 

Just three of the top 10 have a dividend cover that is forecast to be above 1.5 – relatively safe but still below the ideal 2.0. The remaining seven fall short of even that. BP has a cover of just 0.99, meaning it is paying out more to shareholders than it is earning in profits. 

Indeed, three of the companies with the highest yields (Centrica, Direct Line and BP) also have the lowest dividend cover scores for the FTSE 100 as a whole. 

Shares with the lowest dividend cover

At the same time, dividend cover remains a concern across the whole FTSE 100. Previous research by AJ Bell in the third quarter of 2017 put the FTSE 100’s aggregate cover at 1.7. The latest research now puts that figure at 1.63.  

‘The issue of skinny dividend cover refuses to go away’ notes Russ Mould of AJ Bell.

‘Earnings cover for dividends remains much thinner than ideal at 1.63 for 2018 and there has been little real improvement here in 2017,’ he says.

‘Ideally earnings cover needs to be around the 2.0 level to offer a margin of safety to dividend payments, should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.

‘Pearson and Provident Financial are both examples of what can happen in the event of a profits stumble under such circumstances, as both had been offering apparently juicy yields but with skinny earnings cover.’

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