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FTSE 100 dividend delight on overseas earnings boost
The FTSE 100’s approximate 4% yield could provide a useful way to combat rising inflation, according to AJ Bell’s latest Dividend Dashboard report.
With 75% of earnings from the FTSE 100 coming from overseas, the devaluation of sterling has provided a significant boost to constituents of the blue chip index which can feed through to more generous dividend payments.
The report shows consensus profit forecasts for the FTSE 100 have increased from £171bn at the time of the EU referendum to £197bn with forecast dividends rising from £75bn to more than £80bn.
RISK WARNING – 50% of dividends come from just 7 stocks
There are some reasons for caution. Half of the £80bn of dividends from the FTSE 100 index are forecast to be paid out by just seven companies.
Only one of these seven companies has a dividend covered more than 1.5 times by forecast earnings and two look to be paying dividends out of debt or retained earnings with cover of less than 1.0.
A quarter of the constituents of the FTSE 100 are defined by the research as being in the ‘dividend danger zone’ with dividend cover of less than 1.5 and dividend yield of more than 4%.
Some are utilities which have predictable cash flows while others are housebuilders with net cash on the balance sheet but the majority do not enjoy these advantages.
Dividends in the sweet spot
On the positive side of the ledger there are 14 firms with forecast yields of more than 3% whose dividends are covered more than twice over by earnings.
A separate report from IHS Markit implies a very positive near-term outlook for dividends from the wider universe of FTSE 350 stocks, forecast to rise by 25% to a record £20.7bn in the second quarter of 2017.
Most of the hike is expected to come from currency translation benefits and a good chunk (circa £3bn) comes from National Grid (NG.) alone.