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Income Investor: FTSE 100 dividends in the danger zone

Maike Currie

Maike Currie

Probably The Most obvious dividend yields on supply Within The FTSE 100 seem extraordinarily tempting. That’s the good news. Before you gorge your self, however, a well being warning. The inform-tale sign of a imaginable dividend reduce is when the yield on a share appears too just right to be actual.

A Snappy glance on the ranking of dividends for the united kingdom’s greatest firms (I used the web site) confirms that, While the typical yield on the FTSE 100 stands at just below 4 per cent, many companies appear to provide an ideal deal more than this.


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Maike Currie

Four companies — Anglo American, Glencore, Standard Chartered and BHP Billiton — at the moment have double digit dividend yields subsequent to their names. No Longer far behind are the likes of Royal Dutch Shell (A and B share courses), Rio Tinto and Aberdeen Asset Management, promising a yield of greater than Eight per cent. Four others (BP, Pearson, HSBC and Centrica) yield greater than 6 per cent.

When headline yields are this excessive, amber lights will have to begin flashing, No Longer least as a result of dividend duvet — the connection of dividends to the income from which they are paid — has fallen to its lowest stage in six years. In its latest Dividend Screen, Capita predicts the primary significant decline in dividends because 2010.

For a few of the eleven it seems that high-yielders, a reduce is also inevitable. Scalps have already been claimed — with at the least £Three.4 billion of cancellations in 2016 announced to this point, which embody the likes of Anglo American, Glencore and Same Old Chartered.

That mentioned, firms — No Longer least the united kingdom’s blue-chip players with a proud dividend heritage — are likely to do the whole thing in their energy not to reduce the dividend. Administrators understand that the unspoken implication of a minimize is that they have got failed to do their job properly.

Blue-chip dividends
Firm Yield % Market cap (£m)
Anglo American 26.35 5,271.Sixty Three
Glencore 15.Sixty Four 12,565.17
BHP Billiton Thirteen.62 Forty Four,683.30
Usual Chartered 12.03 17,202.Forty Three
Royal Dutch Shell ‘a’ 9.Forty Four n/a
Royal Dutch Shell ‘b’ 9.42 A Hundred And One,532.88
Rio Tinto 9.39 37,838.82
Aberdeen Asset Management 8.Sixty Four 4,006.Forty Six
BP 7.93 65,884.74
HSBC Holdings 7.42 102,997.19
Pearson 6.74 6,420.74
Centrica 6.55 10,717.20
Glaxosmithkline 5.71 64,195.63
J Sainsbury 5.70 Four,713.14
Previous Mutual 5.62 9,817.72

One Of The Most key challenges facing an equity Income fund supervisor is to come to a decision which firms will ship and which gained’t. Some Of These excessive dividends might be paid and buyers who can accurately determine the winners will lock in an incredible Income. However warding off the losers is equally a very powerful.

So will they or won’t they? Let’s start with the miners. Most of nowadays’s (a success) equity Earnings fund managers pride themselves on the truth that they haven’t had any exposure to this beleaguered sector. Will the miners’ fortunes exchange? The Reply will not be and the reason is easy: China.

China’s fixed asset spending underpinned demand for metals In The boom years. But The story of the Beast of the East’s insatiable appetite for commodities now belongs to the history books. We Are merely Not going to see the same levels of demand.

In Fact, the closing males standing could nonetheless pay a meaningful dividend if they may be able to drive out opponents. If we’re taking any bets on which this could be, my money’s on the Australian avid gamers — in the precise place geographically on China’s doorstep and with the lowest price of production. The South African miners, alternatively, face a deluge of challenges, from politics to unions, so as to make it harder to keep prices down.

Turning to grease, it’s well documented that the cave in In The oil worth rests on extra provide and in many ways we now have the makings of a perfect storm: Opec’s refusal to reduce supply to check demand, Russia’s sabre-rattling and Iran’s return to the sector oil market.

These issues won’t resolve themselves speedy, But offsetting them is an elasticity of demand for oil, which mining firms don’t revel in. The collection of miles pushed in most growing international locations is going up and with the costs on the pumps at document lows, individuals are the use of their automobiles More.

Oil wells also turn into much less productive over time. This ‘pure decline rate’ is one this is why Alastair Gunn, supervisor of the Jupiter Distribution Fund, has upped his publicity to the black stuff.

“Relying on who you speak to, oil has a pure decline price of round 5 — 7 per cent every year. The quantity is even better for shale oil as the only manner you maintain provide is by means of drilling new, adjacent wells.

“Come April this year, there’s an enormous refinancing spherical for an enormous chunk of the usa industry and i are expecting to see an enormous dip in oil price profitability with the likelihood of bankruptcies kicking off in earnest over the summer season. And, if your organization is going via potential chapter, you’re not going to keep drilling wells on the related rate.”

Oil firms are very oversold Whereas the steadiness sheets of the big multinationals are in a position to experience out the cave in In The oil worth for no less than the following two years. After All, anything else past this and dividend cuts are certainly on the table. Mr Gunn prefers BP as a Maintaining, announcing the company has been rather more on the front foot in working its industry effectively.

Within The banking sector, Standard Chartered cancelled its dividend at the finish of ultimate yr, Whereas HSBC also has a query mark towards its payout. While also uncovered to Asia, the financial institution’s operations are Extra various than Standard’s. HSBC was additionally much more diligent about cleansing up the mess from 2008. All issues being equal, the dividend seems safe for now, assuming After All Asia does Not go into full meltdown.

In 2016, the watchword for buyers is selectivity — whether or not you might be navigating rising markets, choosing the winners and losers from diverging financial policies throughout the globe or taking a look to type the wheat from the chaff amongst Britain’s blue-chip dividend payers

In Addition To HSBC, most banks aren’t paying very excessive dividends nowadays, However could doubtlessly fall into the rock-solid dividend camp. The likes of Lloyds (1.19 per cent yield) and Barclays (Three.Fifty Seven per cent yield) have passed the financial institution stress exams and are uncovered to the uk the place the macro picture is taking a look slightly certain. As Mr Gunn places it: “The banks are looking for to change into dividend-paying machines.”

As for the other two names on the checklist of dangerously excessive-yielders — Pearson, the former publisher of the Financial Occasions, and Aberdeen — proceed with warning. Each face difficult markets. Pearson has extraordinary headwinds from new rivals, falling cash and a fancy and expensive restructuring to maintain. In The case of Aberdeen, its outlook is intently linked to the clouded image for rising equity markets.

In 2016, the watchword for traders is selectivity — whether you are navigating rising markets, selecting the winners and losers from diverging monetary policies across the globe or taking a look to kind the wheat from the chaff among Britain’s blue-chip dividend payers.

Maike Currie is an Investment director at Fidelity Global. The views expressed are personal.; @MaikeCurrie

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