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Investors warned to be wary of FTSE 100 super-yields
FTSE 100 dividends are expected to jump 36% this year to £84.1 billion, according to figures from AJ Bell, just a fraction off pre-pandemic peaks of £85.2 billion in 2018.
That implies a FTSE 100 yield of 4.1% in 2021, but several names promise significantly higher yields.
Nine companies including Persimmon (PSN) and British American Tobacco (BATS) are currently forecast to pay dividends that yield more than 8%, roughly double the benchmark’s index return. According to Bloomberg, 10-year gilts are currently yielding just over 1%.
Investors have been warned to tread carefully as high yields can often indicate the market doubts current dividends are sustainable.
It is also worth checking if high yields have been inflated by one-off ‘special dividends’ which may not be repeated.
‘The strongest long-term performance often comes from those firms that have the best long-term dividend growth record, rather than being the highest-yielding stock,’ says AJ Bell investment director Russ Mould.
Investors often look for stocks offering progressive dividends as the increased payouts can over time drag the share price higher. ‘A 1p per share dividend on a 100p share price may not catch the eye, but if that dividend reaches 10p in a decade’s time it almost certainly will,’ says Mould.
DISCLAIMER: AJ Bell owns Shares magazine. The writer (Steven Frazer) and editor (Daniel Coatsworth) own shares in AJ Bell.