Interactive Investor

10 highest-yielding FTSE 100 shares in 2023

The UK blue-chip index has underperformed most other major stock markets in 2023 but offers some of the best returns for income seekers. City writer Graeme Evans reveals the most generous dividend stocks right now and whether the payouts are safe.

21st December 2023 13:20

Graeme Evans from interactive investor

Financial stocks packed the biggest punch for income investors in 2023 after Aviva (LSE:AV.), Legal & General Group (LSE:LGEN) and HSBC Holdings (LSE:HSBA) featured among the highest-yielding shares in the FTSE 100 index.

Banks and insurers account for seven of the 10 best yielding stocks, a list topped by the 11.4% at Vodafone Group (LSE:VOD) after it left its dividend unchanged and shares fell another fifth in the year.

The housebuilding and mining sectors, which are traditional starting points for investors seeking income, are not in the top 10, with Taylor Wimpey (LSE:TW.) and Glencore (LSE:GLEN) the best placed at positions 12 and 11 respectively.

The FTSE 100’s overall 4% yield for 2023 continues to compare well with other benchmarks, but it falls short of many savings rates and the 10-year gilt yield for most of this year.

As a result of cuts in the highly cyclical mining industry, Computershare’s Dividend Monitor expects headline payouts to fall 3.4% to £90.6 billion in 2023.

However, underlying growth when excluding special dividends and currency movements should be a robust 5.4% for the year.

Strong contributions have been made by utilities because of their inflation-linked dividend policies, while bank returns continue to improve due to wider net interest margins and the robust position of their balance sheets.

Having provided £1 in every £6 in UK dividends in 2022, distributions from the mining sector are down by about a quarter as lower commodity prices have impacted profits.

The exception is Glencore, which has risen up the ranks of the world’s biggest dividend payers after its latest award of around £3 billion during the third quarter.

Its bumper distribution contributed to September being the most lucrative month of the year for blue-chip investors, with £15.7 billion landing in accounts. 

The support of Shell (LSE:SHEL) and BP (LSE:BP.) has helped offset the dip in mining awards, with December’s payments from the oil giants up 32% and 21% respectively compared with a year earlier.

Yields of 8% and above are typically regarded as a sign that the market thinks a dividend may be unsustainable, as was the case with the 15% at Persimmon (LSE:PSN) at the end of last year. It rebased May’s annual payment to 60p a share as part of a new capital allocation policy.

Companies with a big buffer of earnings to defend their payouts should be a starting point for investors seeking reassurance on dividend security.  Earnings that cover the dividend twice-over are recommended, which is the case for NatWest Group (LSE:NWG) and HSBC in the top 10 list.

Vodafone’s dividend cover stands at 0.9 times, with analysts at Bank of America among those expecting the dividend to be revised lower as the mobile phone giant responds to the impact of its restructuring drive on cash-flow generation.

Vodafone is currently working on plans to jettison weaker assets, including operations in Spain and Italy, and is consolidating in the UK through this year’s Three merger deal.

The 2022-23 dividend was an unchanged nine euro cents a share in May’s annual results, only just covered by earnings of 11.45 euro cents for the year to 31 March. The next award of 4.50 euros cents is due for payment on 2 February.

The next highest-yielding stock is British American Tobacco (LSE:BATS), which is in the process of paying four equal quarterly instalments of 57.72p a share in relation to its 2022 performance.

The yield has risen above 10% after a 29% fall for shares this year, driven by the Lucky Strike owner revealing a £25 billion writedown on the value of some of its acquired US brands. The dividend is 1.6 times covered, compared with 1.9 times for Imperial Brands (LSE:IMB).

The Bristol-based company recently announced a 4% increase for the 2022-23 financial year to 146.82p a share. Together with a 10% increase in share buybacks this will mean total returns of £2.4 billion for 2024 equivalent to 15% of its market value. 

The next biggest forward dividend yield is 10.1% at Phoenix Group Holdings (LSE:PHNX), where strong levels of new business continue to underpin impressive levels of cash generation at the UK’s largest long-term savings and retirement player.

It said recently its balance sheet gave the flexibility to invest surplus capital into growth opportunities and ensured a dividend sustainable “over the very long term”. 

Legal & General has continued to grow its dividend by 5%, part of a strategy that has seen a 600% total shareholder return since Sir Nigel Wilson became chief executive in 2012. 

Antonio Simoes takes the helm on 1 January, with Deutsche Bank believing there’s scope for the new boss to enhance an already attractive 8.3% forward yield through an improved dividend policy. 

The projected yield at Aviva stands at 7.7%, having pledged to distribute £915 million or 33.4p a share across 2023 and to follow this with low-to-mid single-digit growth.

Elsewhere in the financial sector, widely held Lloyds Banking Group (LSE:LLOY) is 14th on the list with a forward yield of 5.9%. That compares with the 7.6% on offer at rival NatWest as the government prepares for a public offer of shares in the next year.

Company

 

Price

Current dividend yield (%)

Dividend cover

Forward dividend yield (%)

Forward dividend cover

Shares in 2023 (%)

Shares in 2022 (%)

One-year change (%)

Forward PE

Vodafone Group (LSE:VOD)

Telecoms

67.23p

11.5

4.8

11.4

0.9

-20.2

-25.0

-19.7

9.5

British American Tobacco (LSE:BATS)

Tobacco

2324p

9.4

1.7

10.3

1.6

-29.2

20.0

-29.4

6.2

Phoenix Group Holdings (LSE:PHNX)

Life Insurance

520.8p

9.8

1.6

10.1

1.0

-14.4

-6.8

-12.7

9.6

M&G Ordinary Shares (LSE:MNG) 

Investment Banking

218.9p

9.0

 

9.2

1.2

16.5

-5.8

21.5

9.1

Imperial Brands (LSE:IMB)

Tobacco

1819.5p

8.1

1.9

8.5

1.9

-12.1

28.1

-11.2

6.1

Legal & General Group (LSE:LGEN) 

Life Insurance

244.9p

7.9

1.9

8.3

0.9

-1.8

-16.1

-0.8

12.8

HSBC Holdings (LSE:HSBA)

Banks

612.8p

4.3

3.6

8.3

2.0

18.8

14.9

24.5

6.1

St James's Place (LSE:STJ) 

Investment Banking

680.8p

7.8

1.4

7.7

1.4

-37.8

-35.0

-37.8

9.4

Aviva (LSE:AV.)

Life Insurance

429.2p

7.2

1.9

7.7

1.1

-3.1

9.2

-1.6

11.9

NatWest Group (LSE:NWG)

Banks

219.5p

6.3

2.9

7.6

2.6

-17.2

9.1

-15.3

5.0

Glencore (LSE:GLEN)

Mining

462.65p

7.6

3.3

7.3

1.3

-16.2

47.3

-12.9

10.9

Taylor Wimpey (LSE:TW.)

Home Construction

143.45p

6.6

2.1

6.5

1.0

41.1

-42.1

42.7

15.3

BT Group (LSE:BT.A)

Telecoms

124.65p

6.2

2.8

6.2

2.4

11.2

-33.9

10.4

6.7

Lloyds Banking Group (LSE:LLOY)

Banks

47p

5.1

3.3

5.9

2.8

3.5

-5.0

4.0

6.2

DS Smith (LSE:SMDS)

General Industrials

306.4p

5.9

2.4

5.9

1.9

-4.7

-16.2

-1.7

9.0

Source: SharePad. Data correct as at end of day 18 December 2023.

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