AJ Bell  

FTSE 100 dividends offer little safety for investors

FTSE 100 dividends offer little safety for investors

While the dividends paid out by FTSE 100 companies in aggregate are expected to increase this year and next, the concentration of payouts around a small number of companies is a worry for investors, according to Russ Mould, analyst at AJ Bell.

He said: “The good news is that analysts are still increasing their aggregate dividend forecasts for the FTSE 100 for both this year and next. Consensus is now looking for a 16 per cent increase in 2017 and an 8 per cent increase in 2018, to £85.3bn and £91.6bn respectively.”

The bad news is that analysts have started to cut rather than increase their aggregate profit forecasts for the FTSE 100, trimming 3 per cent off their forecast for 2017 to £191bn and leaving 2018 forecasts unchanged at £213bn.

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“The effect of profit estimates going down and shareholder payout estimates going up is that earnings cover for dividends remains much thinner than ideal at barely 1.7 times for 2017 and 2018.

"Earnings cover needs to be around the 2.0 times mark to offer a margin of safety to dividend payments, should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.”

Scott McKenzie, who runs the £3m TB Saracen UK Income Fund, said a problem the giant income funds of the sector have is they must, for liquidity reasons, buy the FTSE 100 companies for income, meaning they are, in his view, missing out on better and more reliable income opportunities among smaller cap companies.

Philip J Milton, a Devon-based financial adviser, said he has long avoided buying the big equity income funds because he feels, once a fund gets as large many of those in the equity income sector, they must buy very large stakes in the FTSE 100 income paying stocks and that can leave them stuck with poorly performing investments.

david.thorpe@ft.com