The FTSE 100 can be a goldmine for passive income seekers. The index is full to the brim with companies that reward shareholders through cash payouts in the form of dividends. These payments are so high that the average is more than double that of the S&P 500, the equivalent US index.
Footsie dividends are even higher at the moment, thanks to a general slide in share prices since February. This table shows the index’s top seven dividend payers along with forecasts for the next three years.
| Yield (TTM) | Forecast Year 1 | Forecast Year 2 | Forecast Year 3 | |
|---|---|---|---|---|
| Vodafone | 10.59% | 9.43% | 9.43% | 9.43% |
| M&G | 9.71% | 9.91% | 10.10% | 10.31% |
| Phoenix | 9.18% | 9.50% | 9.75% | 10.09% |
| British American Tobacco | 8.71% | 9.12% | 9.58% | 10.30% |
| Legal & General | 8.36% | 8.77% | 9.20% | 9.72% |
| Taylor Wimpey | 8.06% | 7.85% | 8.03% | 8.13% |
| Barratt Developments | 7.82% | 7.23% | 5.03% | 5.69% |
These forecasts are, to be clear, taken from analysts. But while analysts at big firms like JPMorgan and Barclays don’t have a crystal ball, the average of their predictions – the consensus – tends to be right more often than wrong. And importantly, they can help me decide whether to buy a stock or not.
The Vodafone dividend is a good example. It’s on shaky ground, to my eyes. A decrease in dividends shows there might be some uncertainty regarding future cash flows. Also, the telco has high debt and dividend cover of only 1.1. I’ll be steering clear of this stock for now.
25-year chain
British American Tobacco looks like a much safer dividend. The cigarette company is a fabulous cash generator and revenues are still rising. Throw in a 25-year unbroken chain of yearly dividend payments, mostly increasing throughout that time, and I’m very happy to continue holding my shares here. However, I do accept that declining tobacco consumption is a concerning headwind.
The three finance companies, Legal & General, Phoenix and M&G, all offer huge payouts that look to be increasing too. My issue here is the sector. I aim to follow the Peter Lynch advice of investing in “what you know” and finance behemoths with £300bn of assets are hardly my area of expertise.
That said, I do own shares in Legal & General as I consider it to be among the best-run British companies. I see that dividend as being very safe looking long into the future.
The 2008 crash
The two housebuilders, Taylor Wimpey and Barratt, don’t look anywhere near as safe to me. The housing industry is at a low point right now for a variety of reasons and that’s reflected in these companies’ forecasted dividends.
Housing is famously cyclical though, and both these firms rebounded very well after the last crash in 2008. It’s for this reason that I view both these shares as the best opportunities on this list, in spite of the uncertain dividends.
