The Income Investor: a FTSE 100 dividend play after 21% fall

Having fallen by 11% in the three weeks following the start of war in Iran, the FTSE 100 index has recovered a big chunk of its losses. Indeed, the UK’s large-cap index is currently trading just 3% lower than it was on 27 February, with its dividend yield now standing at a rather unattractive 3%.

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However, not all the index’s members have similarly recovered. Shares in several cyclical firms, particularly those dependent on consumer spending levels, continue to trade at significantly lower prices than they did at the end of February. As a result, it is now possible to obtain substantially higher dividend yields from such stocks than it was just a matter of weeks ago.

Near-term uncertainty

Lower share prices and higher yields among consumer-focused firms are, of course, largely down to investor uncertainty surrounding their near-term financial prospects. They fear that elevated energy prices resulting from conflict in the Middle East are likely to feed through to higher levels of inflation.

A faster rate of price rises means that central banks such as the Bank of England may need to adopt a tighter monetary policy than many investors had previously expected. Alongside potentially higher levels of inflation, this does not provide an upbeat outlook for real-terms wage growth and consumer spending levels.

Risk/reward assessment

Clearly, this situation could negatively affect the dividend outlook for consumer-focused firms. After all, profits are a prerequisite for shareholder payouts in the long run. As a result, many income investors may question whether the higher yields available from consumer-focused firms following their recent share price declines are sufficient compensation for what is now a riskier dividend outlook.

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Indeed, it is presently difficult to accurately assess the risk/reward opportunity of such firms. For example, it is impossible to know whether the war in Iran is now at an end following news of a two-week ceasefire, how severe the conflict’s impact on the economy will be, as well as how central banks will react to a likely spike in inflation over the coming months.

Focusing on fundamentals

Rather than trying to predict the future, therefore, income investors may find it easier to instead focus on company fundamentals when seeking to determine whether a particular consumer-focused firm has dividend investing appeal.

For example, its level of dividend cover can suggest whether shareholder payouts are likely to be affordable during a tougher operating environment. Dividends that are covered twice by net profit, for instance, are likely to be far more sustainable amid potentially declining profitability than those covered little more than once.

Similarly, an assessment of the company’s track record of shareholder payouts can provide an insight as to whether dividends are likely to be stable in future. After all, there have been several periods of elevated geopolitical and economic risk in recent years that have weighed on dividend payouts among consumer firms. They could provide guidance on potential future changes to the firm’s income profile.

In addition, assessing a firm’s financial position provides an indication of whether it can survive, and even capitalise on a period of economic difficulty. Consumer-focused firms that have a competitive advantage, or who sell staple rather than discretionary products, may also be better placed to maintain, or even grow, dividends in the current period of economic uncertainty.

Source: Refinitiv as at 13 April 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 9/10 April on Trustnet), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 9 April. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (8 April). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 13 April and which exclude bonuses.

No guarantees

Of course, assessing company fundamentals does not provide income investors with a foolproof means of gauging risk. The fluidity of present geopolitical and economic uncertainty, after all, means that even the most fundamentally sound consumer firm could still be forced to cut shareholder payouts due to declining profits amid an unforeseeably tough operating environment.

However, focusing on company fundamentals provides a simple and helpful means of determining how much potential reward income investors should demand for the risk they are taking.

For instance, income seekers may accept a relatively low yield for a consumer firm that has substantial dividend cover, a solid track record of shareholder payouts and a strong balance sheet, and vice-versa.

Share price fall

Consumer goods firm Reckitt Benckiser Group (LSE:RKT) appears to offer a favourable risk/reward opportunity from an income investing perspective. Shares in the FTSE 100-listed owner of brands including Finish, Gaviscon and Nurofen have fallen by 21% since the end of February. They now have a dividend yield of 4.2%, which is 100 basis points higher than the FTSE 100’s income return.

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Of course, the company’s shares have been negatively affected of late by the release of its full-year results in March. They stated that the firm expects a weaker cold and flu season in the first quarter of the current year, which it anticipates will impact on sales, although like-for-like net revenue growth is still set to be within its 4-5% medium-term guidance range in the current year. 

Long-term potential

As well as having a relatively high yield, Reckitt’s dividend is well covered by profits. In its latest financial year, for example, its dividend cover stood at 1.7. This suggests it has the capacity to further raise dividends in future following their inflation-beating 5% rise last year. Indeed, the company is currently forecast to increase shareholder payouts by 10% over the next two years. Although inflation could rise from its current 3% level, a 5% annual rise in dividends could realistically provide the firm’s investors with a real-terms rise in their income.

Over the longer term, the company’s strategy could catalyse its bottom line and provide scope for further increases in dividends. Its latest annual results, for example, stated it is confident that its fixed cost base will fall to below its original target of 19% of net revenue by the end of 2027. Alongside this, divestments made as part of a major restructuring mean it is set to focus on a smaller number of brands that could offer greater growth potential over the long run.

Short-term prospects

Clearly, Reckitt’s near-term financial outlook could be negatively impacted by elevated geopolitical risks and a resulting uncertain economic outlook. This could lead to a volatile share price, as well as a less upbeat dividend growth outlook.

Importantly, though, the company has a solid financial position through which to overcome a potentially challenging period. For example, its net debt-to-equity ratio stands at 83%, while net interest costs were covered 11.1 times by operating profits in its latest financial year.

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Furthermore, its focus on staple goods means it may be relatively unaffected by a weaker consumer spending outlook. Its customers may reduce their consumption of discretionary goods sold elsewhere, for example. Meanwhile, strong customer loyalty commanded by several of its brands means it could have a relatively resilient sales profile and the capacity to raise prices to protect profit margins.

Investment potential

Trading on an earnings multiple of 15, Reckitt’s shares appear to offer good value for money at a time when the FTSE 100 index has a price/earnings (PE) ratio of 16.9. It would be unsurprising for them to experience an upward rerating in the long run, given the firm’s sound fundamentals, excellent stable of brands and growth potential as it implements cost cuts and a restructuring.

Its income investing prospects also appear to be sound. A relatively high yield, substantial dividend cover and potential for growth in shareholder payouts mean that while the company faces a tough near-term outlook, its long-term risk/reward opportunity seems to be favourable.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.