The FTSE 100 is having a terrible time, battered by fears of Brexit going wrong, and by contagion spreading from US markets.
The index of top UK shares has lost 8% of its value in 2018, and it could struggle to hold on to the 7,000-point level by the end of the year. How many of us, at the start of the year, were predicting a 2018 close of 8,000 points or higher?
One result of the Footsie’s fall, and a major aspect of what I think we should be doing about it, is that dividends yields are looking better than ever.
In its third-quarter Dividend Dashboard, AJ Bell revealed a forecast overall dividend yield for the FTSE 100 of 4.3% for the full year, and that was expected to rise to 4.5% in 2019. But since then, the FTSE has fallen and by my estimation, that pushes the expected yields to around 4.6% and 4.8%, respectively.
It’s all due to 2018 dividends rising by an estimated 10.5%, with 2019 forecast to bring a further 5.5% rise — and that’s created one of the best dividend-investing environments I think I’ve seen for years. And I’m lining up a shortlist of dividends for my future share purchases.
I’ve already bought a few Persimmon shares (out of dividend income from my other investments), as I see the sell-off in the house-building sector as seriously overdone. There’s a forecast yield of nearly 11% now, though it’s a bit thinly covered — but my colleague Andy Ross believes it’s sustainable. And on a P/E of under eight, I really don’t see much downside now.
Royal Dutch Shell shares have fallen as the oil price once again recedes, but that’s pushed the forecast dividend yield up above 6%. And Shell is renowned for paying its dividend, even through tough times, and hasn’t cut it once since the end of World War II. Oh, and we’re looking at a low P/E multiple of around 9 to 11, which has to be too cheap.
Shell, by the way, is such a big company (with a market capitalisation of around £200bn) that it alone accounts for around 13% of the FTSE 100’s entire annual dividend payments.
British American Tobacco is another attractive looking dividend candidate, with a big forecast yield of 7.4% right now — about 1.5 times covered by earnings, so not guaranteed safe, but by no means one I’d worry about. That big yield is a result of a share price fall of nearly 45% so far this year, mind, and that’s a pretty bad overall return.
But the shares are on a forecast P/E of only around nine and, despite growing opposition to tobacco in the developed world, earnings are still growing nicely. I wouldn’t buy on ethical grounds, but purely on financial grounds, I see British American shares as oversold.
Cash expectations from the pharmaceuticals sector are also looking tasty too, with GlaxoSmithKline shares offering yields of 5%. Earnings growth forecasts are not great yet, and what we have is a static dividend with relatively thin cover. But Glaxo’s decline has been halted and the focus on rebuilding its drugs development pipeline looks to be bearing fruit.
There are plenty more good FTSE 100 dividends out there, and I’m hoping share prices will stay low while I’m in a net investing phase.
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Alan Oscroft owns shares of Persimmon. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.