When it comes to dividends not all FTSE 100 shares are the same. For example, Polar Capital Technology Trust doesn’t pay one. Instead, it prefers to use the surplus cash that it generates to buy shares in other companies in the hope of achieving capital growth.
Another, Alliance Witan (coincidentally, also an investment trust), has a long history of increasing its payments to shareholders. Earlier this year, it announced its 58th consecutive annual rise. But an impressive track record like this doesn’t necessarily mean its dividend is generous. In fact, based on amounts paid over the past 12 months and its current (22 August) share price, the stock’s yielding a disappointing 2.19%.
The average for the index as a whole is 3.36%.
Top of the pile
To find the highest-yielding, it’s necessary to look to the housebuilding sector. Here, Taylor Wimpey’s presently offering a return of 9.41%. However, it announced a 2.7% cut in its interim payment in July. This is a reminder that there are no certainties when it comes to dividends, even with the UK’s largest listed companies.
Ideally, I’m looking for a stock that offers a healthy yield but also one that has a solid record of increasing its dividend each year.
Could this be the one?
With a present yield of 8.54% — and having last cut its payout in 2009 — I think Legal & General (LSE:LGEN) fits the bill. The return I’ve just quoted assumes that the pensions and wealth group sticks to its pledge to increase its payout by 2% in 2025. It also intends to raise it by the same amount in 2026 and 2027.
Although this is less than the current rate of inflation, the group intends to supplement its dividends with a share buyback programme. It claims the overall benefit to shareholders will be better than if it increased its payout by 5% a year.
A challenging industry
But both its dividend and the buying of its own shares could come under threat if its earnings are squeezed. To meet its obligations to pensioners, the group invests in bonds and equities. If a global downturn were to occur, it’s likely that it would want to preserve its cash. The financial crisis of 2008-2009 is a good example of this and was the reason why it cut its dividend 16 years ago.
Also, as the company itself acknowledges, it operates in a very competitive market with some of its competitors unconstrained by Solvency II regulations. The group is also aware that artificial intelligence could enable new entrants to operate with a lower cost base and become more efficient than their larger rivals.
Reasons to be optimistic
But an ageing population and an increasing state retirement age mean the group’s operating in a sector that’s likely to continue growing. As evidence of this, it’s been successful in acquiring large pension schemes to manage. It recently secured the Honda UK and Anglo American funds. Over the next decade, it reckons there could be £1trn of similar assets worldwide up for grabs. Securing a small percentage of these would help underpin earnings and the group’s generous dividend.
That’s why Legal & General is my favourite FTSE 100 dividend stock. Other income investors could consider adding it to their own portfolios.
