Half of FTSE 100 dividends to come from just seven companies in 2017

Royal Dutch Shell and BP are two of the seven big dividend paying firms.

Dividend research forecasts £39 billion will be paid out by just seven firms in 2017, while dividend cover looks ‘worryingly thin’.  

The latest ‘dividend dashboard’ from AJ Bell, which looks at analysts’ forecasts for the FTSE 100 companies, suggests that the blue chip dividend environment looks bleak in 2017.

Although £78.4 billion is forecast to be paid out in 2017 – an increase of 6.25 per cent on 2016 forecasts amounting to a yield of 4.2 per cent – more than half of that (51 per cent) is still expected to come from only seven businesses.

These include oil companies Royal Dutch Shell and BP and pharmaceuticals GSK and AstraZeneca, as well as HSBC, British American Tobacco and Vodafone. 

That level of concentration can leave income investors particularly vulnerable to a dramatic reversal of fortune such as BP shareholders experienced with the Gulf oil spill disaster of 2010, when the business had to slash its dividend.

Another trend of particular concern is the low level of dividend cover, which shows the value of the profits made by a company relative to the value of the dividend it pays out. Ideally, companies will have dividend cover of at least 1.5 times – meaning the profits earned are worth at least one and a half times the dividend paid.

The FTSE 100 has an average dividend cover of 1.46 times, which is less than ideal as it means companies may have to cut dividends if profits fall significantly one year; the alternative would be to stop reinvesting in the business or borrow to maintain dividends at their existing levels.

However more than a quarter of the blue chip index is expected to have dividend cover of less than 1.5 in 2017.

Moreover, the ten companies expected to have the highest dividend yields are forecast to have dividend cover averaging just 1.17. These include builders Taylor Wimpey (forecast yield 8.2 per cent, forecast dividend cover 1.21 times) and Barratt Developments (7.2 per cent and 1.5 times), as well as Shell (6.9 per cent and 1 times) and BP (6.7 per cent and 1.03 times).

Given that many investors go to the FTSE 100 primarily for the income it provides, and are therefore looking towards the higher-yielding constituent companies, a low level of dividend cover also amounts to a warning that payouts could be vulnerable in future years.

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Russ Mould, investment director at AJ Bell, says: ‘BP and Shell are only just covering their dividends, when really you’d like cover of 2 times to provide a decent buffer. They are able to cut investment and have also been borrowing to pay dividends, but that has to be repaid and meanwhile there has been no reinvestment, so it’s not really a good or sustainable arrangement.’

He adds: ‘It can be tempting simply to seek out the stocks that are forecast to pay the highest dividend yield, but it is important also to assess whether the yield is sustainable by looking at dividend cover and whether the dividend is growing,’ says Mould.

In that context, 17 FTSE 100 companies with forecast yields of 3 per cent plus are expected to have dividend cover of more than 2 times, including Capita (yielding 5.9 per cent), Old Mutual (4 per cent) and Next (3.4 per cent).

Among the FTSE 100-focused income fund and trust picks of the expert investment panels that feature in Money Observer’s upcoming Wealth Creation Guide (on newsstands on 22 December) are:

JO Hambro UK Equity Income: one of the best track records for income growth year after year, according to Brian Dennehy of FundExpert.

The Merchants Investment Trust: this blue-chip portfolio has grown its dividend payout for 34 years, and now yields 5.5 per cent.

Temple Bar Investment Trust: two thirds invested in blue-chips, the value-oriented trust picked by Peter Hewitt of F&C has seen a turnaround in its fortunes over 2016 – yet it still yields 5.7 per cent.

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