Risky business as FTSE dividends rest on just six companies

Risky business as FTSE dividends rest on just six companies

Just six companies are driving FTSE 100 dividend growth, and five of those are in the mining and oil sector.

The FTSE 100 is forecast to yield an inflation-beating 4 per cent this year as dividends soar, but experts are concerned about how sustainable the pay outs are. 

The latest AJ Dividend Dashboard forecasts that FTSE 100 investors are set to pocket more than £82bn in dividends this year.

It’s a £10bn, or 15 per cent, increase on the pay outs they received last year. But some people are concerned that this growth is being driven by just four sectors within the index.

Mining companies account for 37 per cent of the forecast dividend growth for the year, and six companies make up more than half of the expected growth.

Chief among them are mining giants Glencore and Rio Tinto, which account for 12.7 per cent and 10 per cent of the index’s growth for the year. Lloyds Bank, BHP Billiton, Royal Dutch Shell and Anglo American make up the rest of the six.

Russ Mould, investment director at AJ Bell, said: “The pay outs from the FTSE 100 this year will be heavily reliant on the price of metals and oil and, in the case of financials, the state of the underlying economy.

“None of these are easy to predict, so investors must be careful to hunt out companies that they feel can sustain their dividends over a long period because it is harvesting and reinvesting these dividends that can really deliver strong total returns.”

The fall in the value of the pound is driving profits up at companies with overseas earnings, which has meant the FTSE 100 has soared in recent months. Around three-quarters of the earnings within the blue chip index come from overseas.

But while dividends are rising, experts are concerned that dividend cover is falling.

Dividend cover is expressed as a ratio; a ratio of 1 indicates that the company has exactly enough money to cover its pay outs, and 2 is considered a desirable level.

But Royal Dutch Shell, whose shares are currently yielding a meaty 6.8 per cent, is forecast to have dividend cover of just 0.91.

BP, which yields 6.4 per cent, is even lower at 0.82. Some 25 firms within the index have dividend cover of less than 1.5 times earnings, and the current average is just 1.29, according to figures from AJ Bell. 

Gary Reynolds, chief investment officers at Courtiers, said: “If you look at dividends paid out in relation to companies cash flow then it looks OK.

"But I would not buy the index passively at the moment, there have been some major companies which have seen profits fall and investors need to pick their way through to find those stocks which are producing decent earnings and can pay sustainable dividends.”

Peter Elston, chief investment officer at Seneca Investment Managers, is looking to the mid-cap part of the market instead where the companies he is packing have dividend cover of 2.1 times earnings.