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It's been a while since I've felt this optimistic about the dividend outlook for the UK stock market.
the latest Dividend panelof AJ Bellshows an analyst consensus for a 1% increase in cash dividends this year. And there is a further 7% increase planned for 2025, reaching £83.9bn.
That wouldn't take us to 2018's all-time record of £85.2bn. But we might miss by just a hair.
However, over the past few years, analysts started with high hopes and lowered them a bit as the months went by. But even with that, I still share the optimism.
Buyback push
A quick look at the first few days of this week shows dozens of FTSE 100 companies dedicated to the repurchase of shares.
Barclays and HSBC Holdings, P.A. and Shell, BAE Systems, tesco, Prudential…everyone is doing it. It is not just about a few sectors, but about all areas.
When such a diverse range of companies want to buy their own shares at current prices, it makes me want to join them.
And the buybacks should boost future dividends per share.
Big risky returns?
Let's look at one of the highest performances.
Savings and investments manager M&G (LSE: MNG) will pay a dividend yield of 9.7% in 2024.
That is not guaranteed, as no dividend ever can be. But we are getting closer and closer to the end of the year and so far there are no obvious problems. And that increases my optimism.
With such a large yield, I tend to be cautious. Will there be enough income to cover it? What will the next few years be like? Have we had cuts in recent years? Does future cash look a little weak?
Those things went wrong for Vodafonewhich is set to cut its 2025 dividend in half. For years, it simply didn't generate the cash to give me confidence in its large dividend. And that finally got annoying again.
Future prospects
I haven't decided if I would buy M&G. But forecast earnings look comfortably higher than the dividend, with coverage around 1.35 times. For this type of company, which does not require a lot of capital, I think it is fine.
There hasn't been any dividend cut in the last decade and I see no reason to fear one in the coming years.
There is a specific risk as M&G is coming out of a bad patch when people stopped using investment services. We are not out of that danger yet. And inflation remains a concern, keeping people's hands more firmly in their pockets.
But across the FTSE 100, I see similarly optimistic earnings expectations. The cover is a little thin in some cases, but overall I find it sturdy.
As a general precaution, the Dividend panel points out that we have had 137 dividend cuts from current FTSE 100 stocks in the last decade. Of them, 74 were in 2019 and 2020 (and some, like the banks, returned quickly).
Dividend investing is never a risk-free strategy. But right now, I think the potential reward-risk ratio of FTSE 100 dividends could be the best I've seen for some time.
