The UK is an attractive market for those seeking income, especially now that the FTSE 100 index is forecasting a dividend yield of 4.1% for 2023. The market is so sought after, that on Friday global fund manager Jacob de Tusch-Lec said he was envious of those that only invest in the domestic market.
However, with just 10 of the index’s names expected to pay more than half (55%) of the £85.8bn in predicted pay-outs this year, investors need to be comfortable with their ability to meet these forecasts, according to Russ Mould, investment director at AJ Bell.
Here, Trustnet asks IA UK Equity Income managers which of the FTSE 100’s top yielders are worth looking into.
Source: AJ Bell
Mining company, Glencore, has the highest estimated yield at 10.2%, but Mould pointed out that few businesses that have promised a dividend in excess of 10% have achieved this target in the past.
He highlighted Shell, Centrica, Royal Mail and Marks & Spencer as examples of companies that have had to cut their dividends after forecasting a high yield.
Mould said: “A fat yield can be a sign of market scepticism as to whether the payment will be made, either because of the macro backdrop or the company’s particular circumstances or both.”
Glencore was a beneficiary of the rally in mining companies in the rotation towards value, with the company’s share price up 22% over the past year, but David Cumming, manager of the BNY Mellon UK Income fund, said that it can continue to thrive.
Share price of Glencore over the past year
Source: Google Finance
“With significant coal exposure, Glencore is well-positioned to generate significant capital returns post the energy dislocation as a consequence of Russia’s war,” he said.
“We feel coal will remain elevated for the next few years unless there is a significant regime change in Russia.”
The £64.4bn company also has significant exposure to materials crucial to the energy transition such as copper, cobalt, nickel and zinc, which may appeal to those wanting to invest in the theme of net-zero. Glencore accounts for 5.1% of the assets in Cumming’s £1.3bn portfolio.
Although commodities companies can be cyclical in nature, Mark Barnett, manager of TM Tellworth UK Income and Growth fund, said that Glencore’s marketing and transportation branches are “likely to remain highly profitable and cash generative” in times of volatility.
While Glencore was a solitary figure as the only mining company on the list, there were several financial firms. M&G, Phoenix, Aviva and Legal and General were among the companies with the highest yield forecasts this year.
Barnett picked out Legal and General, which has an estimated yield of 7.9% for 2023 as one that he is particularly enthusiastic about.
He said the company’s track record for dividend growth was strong and noted he prefers it to many of its peers in the financials space as it was one of the few to maintain pay-outs during the pandemic.
Shares in the £15.3bn business are down 5.5% over the past year despite growing its dividend payments over recent years.
Share price of Legal and General over the past year
Source: Google Finance
Barnett said: “We believe Legal & General is the best way to participate in the bulk annuity market, which is witnessing a strong and growing pipeline for new business given the significantly improved funding position for UK defined benefit schemes.”
Housebuilders such as Persimmon, Taylor Wimpey and Barratt also took up high positions on the list, with the three companies projected to have yields of 8.4%, 7.7% and 7.7% respectively.
Andy Evans, co-manager of the Schroder Income fund, pointed out Taylor Wimpey as one of his top picks, with the business making up 1.5% of his portfolio.
Shares in the £4.3bn house builder are down 18.2% over the past year as investors remain cautious on UK housing and the impact of rates rises on property prices, but Evans said that the company is well suited to weather any volatility in the sector.
“While the whole sector is on sale, Taylor Wimpey offers the one of the strongest risk return trades given the low valuation and a very strong balance sheet that should allow it to withstand a significant downturn,” he said.
Share price of Taylor Wimpey over the past year
Source: Google Finance
British American Tobacco is another high-yielding business that Evans said was worth looking at, with the business accounting for 2.8% of Schroder Income’s total assets.
He said that its growing revenues across global regions is “impressive” considering that “many argue is in structural decline”.
Indeed, it could be argued that the declining number of smokers and growing divestment from environmental, social and governance (ESG) investors could impact its business model in the long term, but the £70.7bn company has a dividend yield forecast of 8.3%.
Evans said: “There are still challenges to negotiate – the regulatory environment for e-cigarettes for instance, which is becoming tougher in the US which is their biggest market.
“Nonetheless, at an attractive valuation we think the shares are attractive, alongside a healthy, well covered dividend.”
Shares were up 28.2% throughout 2022, but its price slipped 3.5% from the start of this year. Even so, Will Bradwell, manager of the Martin Currie UK Equity Income fund, said that his is still confident that the company can “comfortably pay a market beating dividend regardless of economic conditions”.
He added: “The shares have gotten off to a weak start to the year with growth stocks outperforming and concerns over traditional cigarette volume declines in key markets and regulatory overhangs but we are not so pessimistic about the prospects for the sector.”