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FTSE 100 dividend yield: Will economic slowdown threaten income-seeking investments?

12:38, 11 August 2022

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  • BP
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  • UK100
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woman walking in front of FTSE 100 board
FTSE 100 dividends likely to grow - Photo: Getty Images

A slowing economy will likely reduce revenues for oil and gas companies, which have been some of the highest dividend payers on the FTSE 100 (UK100). However the effects of these are not likely to affect dividend pay-outs , as companies will cut costs before they slice dividends.

Many companies on the index such as Shell (RDSa), Glencore (GLEN), British American Tobacco (BATS) and Rio Tinto (RIOgb) are reluctant to reduce dividends due to the negative signal it would send out to their earnings seeking investors.

FTSE 100 (UK100) Price Chart

In fact, according to several analysts, companies in certain sectors are likely to grow their dividends in 2022, despite the current economic climate. This is likely to push the FTSE 100’s pay-out to levels previously seen in 2018.

Healthcare companies on the index have seen a growth in revenue, which is likely to be paid out as special dividends. This will go on to make GlaxoSmithKline (GSKI), Unilever (ULVR) and AstraZeneca (AZNs) some of the highest dividend payers of 2022.

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GlaxoSmithKline (GSKI) Price Chart

Will high dividends sustain?

Dividend yield is likely to rise in 2022 to 4.2% up from 3.9% in 2021. Russ Mould, investment director at AJ Bell says in an analyst note that this is despite “concerns over increases to input costs, interest rates (and therefore the cost of capital) going up, as well as increases in taxes for 2023”

AJ Bell’s report on dividend outlook predicts the total pay-out to hit about £85 billion, reaching a high last seen in 2018.

Many companies on the FTSE 100 (UK100) have investors interested in them due to their consistent dividend pay-outs. Slashing the pay-outs could cost these companies more than it would save.

Mould says “ “These firms offer the dream combination of higher dividends and a higher share price – the increased distribution will over time drag the share price higher through sheer force. For instance, a 1p per share dividend on a 100p share price may not catch the eye today, but if that dividend reaches 10p in a decade’s time it almost certainly will”

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Furthermore, 97 of the 100 companies are likely to pay in 2022, up from 91 in 2021, and 86 in 2020.

 

Top payers

Rio Tinto (RIOgb), and Shell (RDSa) will maintain their top spots as the highest dividend payers on the FTSE 100 (UK100)

The healthcare sector is due to see a 44% increase in revenue, pushing Unilever (ULVR), GlaxoSmithKline (GSKI) and AstraZeneca (AZNs) into the top ten.

However, mining companies are at risk, a report by AL Bell states “the forecast drop in miners reflects higher costs and the assumption that lofty metal prices may not last.”

Shell (RDSa) Price Chart

Risks for investors

There remains a concentration risk for investors who may be looking to create an income generating portfolio. Ten of the highest dividend yielding companies are responsible for 56% of total payment in 2022. This makes the portfolio sensitive to the demise of a single company on that list.

Russ Mould warns “Those forecast yields sound attractive but investors should take note of the records of firms previously expected to generate such bumper pay-outs. Firms including Vodafone (VOD) , Shell (RDSa), Evraz, Centrica (CNAI), Royal Mail (RMG) and Marks & Spencer (MKS) were all due to pay a dividend over 10% as a FTSE 100 firm at one time or another. Instead, they cut the dividend, demonstrating nothing can be taken for granted, especially if a recession hits”

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