Forecasts are down, but I see a bright future for FTSE 100 dividend stocks

Cash forecasts for UK dividend stocks are falling… time to panic! Actually, no. I reckon the future has never looked better.

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The last couple of years have been great for dividend stock investors.

Each year, forecasts for FTSE 100 dividend payouts have been growing. Well, I say growing, but the rate of growth is being pared back.

I’ve read the latest Dividend Dashboard from investment services firm AJ Bell (LSE: AJB). And I see dividend forecasts for 2024 and 2025 are £10.3bn lower than a year ago. That’s an 11.5% drop.

Yield falling

The FTSE 100 yield has dipped to 3.8% for 2024, and 4.1% for 2025.

Not long ago, the City expected 2024 ordinary dividends to smash through the record set in 2018. But the latest consensus of £79.7bn would fall 6.5% short of the £85.2bn paid that year.

Still, we might be on for a new record in 2025… unless forecasts are scaled back some more in the next 12 months.

Gloom?

Is this bad news for dividend investors? Nope. I still think we’re in a golden age for dividend stocks.

Part of the fall seems to be down to firms moving to share buybacks as a way to return surplus cash. In a time when share prices are historically low, I think that’s good sense.

Russ Mould, investment director at AJ Bell, said: “The value of the buybacks announced by 25 FTSE 100 members so far in 2024 currently stands at £27bn, to perhaps give the FTSE 100 a platform for a crack at 2022’s all-time high of £58.2bn, or least 2023’s provisional total of £52bn.

Buybacks added to ordinary dividends suggest an overall cash yield of 5.3% from FTSE 100 stocks.

Economy

While I’m still upbeat about UK dividend stocks, I do see some reason for caution. Some of the downgrades will be due to the economy, for sure.

Nobody thought inflation would get so high. Or interest rates would be hiked so far, and remain there for so long.

The lower free spend from the UK population feeds through to reduced company profits, and less cash available for dividends.

Future

What does the wider future for UK stocks look like? I expect a lot will be driven by market sentiment.

And what better way to see where that’s going than to take a peek at the outlook for an investment firm, AJ Bell itself?

Broker forecasts suggest we should see earnings per share (EPS) growing by 25% between 2023 and 2026. And that would be down to rising revenues from the firm’s trading services.

We could see the dividend rise by 22% in the same time, with the yield rising to over 4%. Hmmm, and the stock value looks attractive… a P/E of 16, dropping to 14 by 2026, doesn’t look at all stretching.

Maybe I should consider adding AJ Bell to my Stocks and Shares ISA.

Bullish

Anyway, over the next 10 years, I think FTSE 100 dividends could smash through that 2018 record… multiple times. But that’s just a guess, just for fun.

We could still see pain in the short term, if dividend cash should slip. And the trend for forecasts is down, for now.

But UK dividend stocks are still tops for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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