This time last year UK dividends were increasingly hard to come by.
The pandemic-induced halt to payouts across sectors and geographies had investors concerned over where they could source an income from their investments.
It might have been a freak year but it did show us we shouldn’t get complacent about the UK dividend environment.
As major dividend payers like the nation’s banks gradually come back online there will naturally be a drive among investors to make up for lost time.
That can mean shooting straight for the biggest dividend payers on the FTSE 100.
The highest dividends can be misleading though. To understand why, let's look at exactly what a dividend yield tells us.
If a firm opts to pay a 5p dividend and currently has a share price of 100p, its yield is 5%.
But if that firm’s share price drops to 50p, that 5p dividend now becomes 10%. That might have income-seekers licking their lips but why has the stock fallen by half?
For whatever reason, is its ability to pay the dividend now diminished? Quite often that’s the case. High dividend yields can be a signal for problems elsewhere in the business.
And even if a firm can stretch itself to pay that dividend it might not be the best option for shareholders in the end. Will it be able to pay a consistent dividend next year or is it simply kicking the problem down the road?
Now, this won’t always be true but all this is a way of saying be careful. The highest yielders aren’t always the most reliable yielders.
A good investor will always look beyond the headline yield to determine if the dividend is sustainable over the long term. That’s the pinch of salt investors need to carry when looking at the biggest dividends out there.
Here are the current highest yielding shares on the FTSE 100 as of 7 June 2021 according to dividenddata.co.uk. We have indicated with an asterisk (*) where any of the companies has made a dividend cut to the most recent dividend or has stated the next dividend will be cut.
Tobacco companies have been the go-to for a lot of income seekers over the years. Relatively high and dependable dividend streams seemed attractive but there is a sense that current yields are masking a cultural shift in smoking habits.
The total number of smokers globally has actually been rising due to population growth. But, beyond sheer numbers, smoking rates are falling in most developed markets.
Sales of traditional tobacco products are in a precarious position as education grows around the health issues associated with smoking.
But the threat here isn’t necessarily consumer habits, it’s a regulatory environment informed by governments counting the cost of dealing with ill-health brought on by big tobacco.
That focus on the industry has hit the shares of Imperial Brands hard since 2016. A super low price-to-earnings ratio and high yield might entice a few value investors but, for a large part of the market, it’s the sign of a sector in decline.
What’s more, Imperial recently announced a dividend cut to allow the firm to address its debt pile.
If the company has the ability to generate a higher percentage of its revenues from its so-called Next Generation Product (NGP) segment, including the Blu range of vapes and e-liquids, there could be hope.
But if the likes of India and China begin to introduce tighter smoking restrictions in a bid to improve public health, there could be a real existential crisis for the sector and its dividends.
British American Tobacco is trying to make the shift towards NGPs to align with those changing consumer habits.
BAT is targeting £5bn in revenues from its New Category products by 2025 and 50m consumers of its non-combustible products by 2030. That latter figure currently sits at 14.9m, having added 1.4m consumers in the latest quarter.
The company still relies heavily on its traditional products and has actually managed to up its revenue guidance for 2021 on the back of stronger overall sales.
But, again, the headwinds aren’t necessarily coming from consumers. Until regulation really starts to bite, investors might still like the firm’s strong cash-generative abilities and generous dividend yield. But, there is always the feeling that the narrative for the whole sector won’t end well unless it makes serious changes.
In its half-year update, the company said it’s seeing “continued recovery in emerging markets” and “a robust US performance.” as well as reporting a 0.1% rise in its global cigarette market share.
But BAT isn’t immune to broader demographic forces and expects market volumes to decline by 3% this year.
There is then the issue of the company’s debt. Imperial has made clear plans to address their own debt pile by giving the dividend a haircut - it may be that BAT has to do the same.
A hike in demand for steel has sent the price of iron ore up to record levels recently. That’s been good news for Russia-based Evraz and its post-March 2020 share price recovery.
As lockdowns have been steadily loosened, demand for steel has increased as countries get back to industrial and infrastructure projects. But production has lagged demand which, along with low levels to begin with, triggered a huge steel price rally.
Evraz has a hand in pretty much every stage of steel production, from managing iron ore mines to the steel foundries it uses. And it’s that high degree of self-sufficiency that has drawn a lot of investors in.
A low-cost proposition already, the company was able to change tack and offset weaker domestic sales with exports over the year. But, as with all commodities, prices can moderate quickly.
Steel prices in particular could start to level off and normalise later this year as plants get back online and the order backlog is dealt with.
That could mean a dent to profits for Evraz and, in turn, the dividend.
Record low interest rates since the financial crisis have pushed many would-be savers up the risk ladder and into equities like UK and US company shares in search of income.
A lot of the mutual funds out there offering pooled investment opportunities to suit retail investors are run by listed firms, M&G being one.
Normally known for its focus on fixed income, M&G’s assets under management and administration rose by 4% to £367bn last year.
Firms in the sector have come to represent a kind of proxy for our participation in global stock markets. And in an ultra-low interest rate world, anyone aiming to get a decent return on their money might just continue buying funds and holding them with the likes of M&G.
That could continue to be supportive for the volume of assets they administer, and the fees they charge to do so.
That also means a sudden loss of appetite for the stock market could hit revenues - a possibility if interest rates rise and cash savings start to look attractive again for the risk averse.
But for now, investors looking to outsource the investment decisions to someone else are propping up M&G and Co.
The Persimmon share price has been on a tear over the past year, as governmental support in the housing market went some way to steady the nerves of a property-mad nation.
The house builder was hit hard initially as construction came to a halt but steady progress back to business as usual seems to have breathed life back into the share price.
The house builders have benefited greatly from governmental intervention over the past few years, with Help to Buy and stamp duty holidays helping support the sector’s bottom line.
Persimmon benefited more than most, as its huge London footprint took advantage of Help to Buy in particular.
Throwing up flats quickly, pricing them at the higher end of the scheme’s range and pocketing governmental support money underpinned the firm’s strategy heading into the pandemic.
That might make investors a bit nervous at the prospect of that support being withdrawn eventually but that concern has yet to be reflected in the firm’s share price. It seems like the market considers that 2023 to be a long way off, and may even be replaced by another programme in the end.
Build rates now look back to normal and, importantly for Persimmon, forward sales have increased to £3bn. This figure was only £2.4bn in 2020 and £2.7bn in 2019.