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It’s a while since I’ve felt this bullish about the dividend forecast for the UK stock market.
The latest Dividend Dashboard, from AJ Bell, shows an analyst consensus for a 1% rise in dividend cash this year. And there’s a further 7% rise pencilled in for 2025, to reach £83.9bn.
That wouldn’t quite get us to 2018’s all-time record of £85.2bn. But we might miss by only a whisker.
For the past few years, analysts have started out with big hopes and pared them back a bit as the months pass, though. But even with that, I still share the optimism.
Buyback boost
A quick look at the first couple of days of this week alone shows dozens of FTSE 100 companies engaged in share buybacks.
Barclays and HSBC Holdings, BP and Shell, BAE Systems, Tesco, Prudential… they’re all doing it. It’s not just a few sectors, it’s across the board.
When such a diverse range of firms want to buy their own shares at today’s prices, it makes me want to join in.
And buybacks should boost future per-share dividends.
Risky big yields?
Let’s look at one of the biggest yields.
Savings and investment manager M&G (LSE: MNG) is forecast to pay a 9.7% dividend yield in 2024.
That’s not guaranteed, as no dividend ever can be. But we’re inching closer to the end of the year, with no obvious problems so far. And that lifts my optimism.
With such a big yield, I’m usually wary. Will there be enough earnings to cover it? What do the next few years look like? Have we had cuts in recent years, and does future cash look a bit weak?
Those things went wrong for Vodafone, set to slash its 2025 dividend in half. For years, it just wasn’t generating the cash to give me any confidence in its big dividends. And that’s finally come back to bite.
Future outlook
I haven’t decided whether I’d buy M&G. But forecast earnings look comfortably ahead of dividends, with cover of around 1.35 times. For this kind of company, which is not capital intensive, I think that’s fine.
There’s been no dividend cut in the past decade, and I see no reason to fear one in the next few years.
There is specific risk, as M&G is coming out of a tough patch when people pulled back on their use of investment services. We’re not out of those woods yet. And inflation is still a worry, keeping people’s hands more firmly in their pockets.
But across the FTSE 100, I’m seeing similarly upbeat earnings expectations. Cover is a bit thin in some cases, but it generally looks strong to me.
As a general caution, the Dividend Dashboard points out that we’ve had 137 dividend cuts from today’s FTSE 100 stocks in the past decade. Of those, 74 were in 2019 and 2020 (and some, like the banks, quickly came back).
Dividend investing is never a no-risk strategy. But right now, I do think the potential reward-to-risk ratio from FTSE 100 dividends might be the best I’ve seen for some time.
