• AJ Bell highlighted in a report Wednesday that investors will need to look carefully at the 10 firms expected to yield the highest payouts to shareholders this year, since several of them have a record of being forced to cut dividends during challenging times.
• Rio Tinto is the highest-yielding individual stock in the FTSE 100, with an expected yield of 12%, followed by BHP at 9.2%, Imperial Brands at 8.7% and Evraz at 8.5%.

LONDON — Total FTSE 100 dividend payments are expected to rise by a quarter this year to £76.9 billion ($106.3 million), meaning the U.K.'s leading index is set to yield 3.7% for 2021, according to data aggregated by British stockbroker AJ Bell.

Meanwhile the index's average dividend coverage ratio, which measures the number of times a company can pay dividends to its shareholders, has improved to 1.83x, its highest level since 2014.

To supplement the higher dividends, many FTSE 100 companies have begun to announce share buybacks. A total of twelve firms have so far announced buybacks to the aggregate tune of £7.2 billion: Barclays, Berkeley, BP, CRH, Diageo, Ferguson, NatWest, Rightmove, Sage, Standard Chartered, Unilever and Vodafone.

Share buybacks are when a company purchases its own shares from the open market, driving up the share price.

AJ Bell highlighted in a report Wednesday that investors will need to look carefully at the 10 firms expected to yield the highest payouts to shareholders this year, since several of them have a record of being forced to cut dividends during challenging times.

Top 10 yielders

Rio Tinto is the highest-yielding individual stock in the FTSE 100, with an expected yield of 12%, followed by BHP at 9.2%, Imperial Brands at 8.7% and Evraz at 8.5%.

"Forecast of yields in the region of 10% may make investors a little wary, given the shocking record of firms previously expected to generate such bumper returns, including Vodafone, Shell, Evraz itself and – when they were still in the FTSE 100 – Royal Mail, Marks & Spencer and Centrica," said AJ Bell Investment Director Russ Mould.

"All were forecast to generate a yield in excess of 10% at one stage or another and all cut the dividend instead."

Mould added that China's reported discontent with surging iron ore prices may lead some investors to question the likelihood of such a bumper payment from Rio Tinto. Analyst consensus does not anticipate a repeat performance in 2022, he pointed out.

The remaining companies in the top 10 are Persimmon (7.7%), Admiral Group (7.6%), M&G (7.5%), British American Tobacco (7.5%), Anglo American (7.2%) and Phoenix Group (6.9%).

Miners and banks also dominate the list of 10 companies expected to make the biggest individual contribution to the £15.3 billion total increase in FTSE 100 dividends this year, the report highlighted, with HSBC, Barclays, Lloyds and NatWest all featuring.

'Dividend aristocrats'

Mould suggested that investors will need to assess concentration risk — the danger of having too much exposure to a particular sector or type of stock — when it comes to dividends as well as earnings, an issue often associated with seeking income from the U.K. stock market.

He also highlighted that historically, the highest-yielding stocks do not prove to be the best long-term investments.

"Often defending a high yield can be a burden for a firm, as it sucks cash away from vital investment in the underlying business, or can be a sign that the company is in trouble and investors are demanding such a high yield to compensate themselves for the (perceived) risks associated with owning the equity," Mould said.

"The strongest long-term performance often comes from those firms that have the best long-term dividend growth record, as they provide the dream combination of higher dividends and a higher share price – the increased distribution will over time drag the share price higher through sheer force."

The FTSE 100 currently has 15 firms which can evidence a 10-year dividend growth track record, with nine firms having dropped off that list since the pandemic.

Industrial equipment rental company Ashtead tops the list, with a total return of 3,425.4% between 2011 and 2020, followed by Intermediate Capital at 1,031.1% and the London Stock Exchange at 991.2%.

The firms, which Mould dubs "dividend aristocrats," are: Scottish Mortgage (865%), Spirax-Sarco (734.8%), Halma (703.4%), Croda (369.4%), RELX (368.6%), DCC (311.8%), Diageo (259.2%), Hargreaves Lansdown (258.7%), United Utilities (175.2%), National Grid (163.5%), Sage (94%) and British American Tobacco (69.9%).