Interactive Investor

10 highest-yielding FTSE 100 dividend shares at end of 2022

23rd December 2022 11:10

by Graeme Evans from interactive investor

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Not only has the UK's blue-chip index performed better than most other global stock markets in 2022, it pays higher dividends too. These are the best of the best.

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The appeal of the FTSE 100 index for income investors seeking to offset the ravages of inflation is highlighted by 10 stocks trading with forecast yields of 8% and above.

Across the UK’s leading 100 companies, the impact of lower share prices and a stable dividend outlook means that Link Group sees an average 4.3% yield over the next year.

That’s well ahead of best buy cash savings rates, but fixed income is now much more tempting as the 10-year gilt yield has reached a par with equities for the first time in a decade.

The stock market opportunity for investors looking to offset inflation comes with a health warning, however, as yields of 8% and above are typically regarded as a sign that the market thinks the dividend is unsustainable.

Companies with a big buffer of earnings to defend their payouts should be a starting point for investors seeking reassurance on this front.

Dividend cover of at least two times means that profits could cover the dividend twice over, something that’s the case for three of the companies in the top 10 list.

Henderson International Income (LSE:HINT) Trust believes that dividend cover is now stronger in the UK than at any time in the last 10 years, pointing out that many companies rebased their dividends in the pandemic, so these are now on a more sustainable footing.

Companies returning cash through share buybacks are also a positive sign for investors, given that these programmes will be stopped before a dividend cut needs to be considered.

The biggest question mark for income-seeking investors concerns Persimmon (LSE:PSN)’s 15% yield, which has grown as shares weaken in the face of deteriorating trading conditions.

The chances of dividend disappointment have increased after the company announced in November plans for a new capital allocation policy, replacing the usual award of 125p a share plus special distributions with a more conventional dividend cover approach.

Ahead of its results in March, Persimmon said: “Guided by the new policy, when proposing the 2022 dividend the board will carefully consider the business’ performance, financial position and outlook at that time. There will be no special distribution for 2022.”

The return of cash built up on their balance sheets means housebuilders often lead  the FTSE 100 in terms of above-average yields. Taylor Wimpey (LSE:TW.) and Barratt Developments (LSE:BDEV) currently yield 8.5% and 9.2% respectively, but with dividend cover of at least two times.

Glencore (LSE:GLEN) has the best dividend cover in the top 10, with the mining giant’s profits outlook supported by a coal price that continues to be five-times its long-term average.

Mining companies remained the largest payers in the third quarter of 2022, contributing £7.1 billion of the overall UK total of £31.4 billion. However, this sector performance was down by a fifth as the commodity cycle rolled over.

Link estimates that miners will still contribute £1 in every £6 in UK dividends this year and may remain the largest paying sector in 2023, although expectations for falling metals prices mean the gap will narrow significantly with the oil sector.

Oil and gas dividends rose by a fifth in the third quarter but Link says share buybacks provided “a more discreet means” of rewarding shareholders for booming profits.

The post-pandemic recovery in banking dividends continued during 2022, with the sector lifting distributions by 49% or £2.7 billion as the largest contributor to the overall dividend growth seen in the third quarter.

NatWest Group (LSE:NWG) generated the most headlines in the sector after it declared a large special dividend of 16.8p a share and a smaller interim payout that was up 17% year-on-year. February’s annual results are expected to show a total dividend for the year of 29.7p.

Across 2022, the surge in the US dollar is likely to have added a record £5.7 billion to UK dividends as two-fifths of UK payouts are declared in dollars or euros.

Link said in its recent report that the £1.9 billion exchange-rate gain in the third quarter was second only to the period of the financial crisis in the first quarter of 2009.

For 2023, Link forecasts a slight drop in headline dividends to £96 billion and a slight increase in the underlying total to £89 billion. It added: “This implies no change in our expectation that UK payouts will only regain their pre-pandemic highs some time in 2025.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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