Each month we crunch the numbers to find you the most reliable, high dividend payers in the FTSE. With plenty of big names cutting their dividend payments this year – and recent research showing underlying dividends at a three-year low – the quest for steady income is more important than ever. We have aimed to weed out the firms which have high payouts one year only to slash them the next, focusing on firms with competitive advantages and a fair share price.
For October FTSE 100 tobacco firm Imperial Brands (IMB) has regained the top spot from BT in our monthly round-up of the highest dividend yields, with a payout of above 10%.
But rather than a hike to its dividend, the increase in the headline yield is down to further weakness in its share price after chief executive Alison Cooper announced her departure.
Cooper’s exit was revealed in early October but the company has yet to unveil a successor as the tobacco industry faces up to one of the biggest crises in recent years. A number of deaths in the United States from vaping has cast doubt over whether e-cigarettes are a safe alternative to traditional tobacco. Shares are currently trading at £18.30, from £23.82 at the start of the year, a drop of 23%.
In terms of forward yield, BT’s 8.33% remains the standout among our surveyed companies but it is expected to cut its payout this year and its next results are due at the end of October, where more details may be revealed.
There are a number of new entrants to out top 20 list, including specialist chemicals firm Croda (CRDA), with a yield of 6.23% and educational publisher Pearson (PSON), which just sneaks into the top 20 with a yield of 2.73%. Croda has stormed into the elite league with a bumper payout in May this year of a special dividend of 115p per share.
Pearson’s has shot up for the wrong reasons: another profit warning in recent weeks has pushed the shares down from 860p to 685p, a slide of 20%.
The arrival of Croda in the top 10 has nudged some more established players down the list this month, such as GlaxoSmithKline (GSK) and AstraZeneca (AZN). Those leaving the top 20 in October include Meggitt (MGGT) and Bunzl (BNZL).
How We Select Companies
Morningstar.co.uk has filtered 20 income shares using a range of criteria. Each income stock must have an “economic moat”, which means that the company has a sustainable competitive advantage. Stocks with a “narrow” or “wide” moat make the cut. We then add in the star-rating, which indicates whether the company’s shares are trading below or above their fair value.
We also look at the historic yield (trailing 12 months) and compare that with the forward yield.
Another filter is then added to screen for those companies whose five-year dividend yield is less than 15%. This adds an element of consistency – for example, a one-off special dividend would skew the yield in one year to an artificially high level – and remove companies whose share price plunge has pushed the yield up significantly.
There is an inverse relationship between share prices and yield – the dividend yield on a company will rise when the share price rises and vice versa. That’s why the top 10 on our list is dominated by companies rated as four and five stars by Morningstar, which means analysts think they are trading below their fair values.