As I wrote yesterday, one of the great joys of investing in shares is watching my passive (unearned) income roll in. As the years go by, I look forward to banking increasingly larger share dividends in my family portfolio. Dividends are regular cash payments made by companies to their owners: shareholders. Usually, UK firms pay dividends either quarterly (four times a year) or half-yearly (interim and final dividends). I use these regular cash payouts — particularly from large, reliable FTSE 100 companies — to generate income to spend or buy more shares.
FTSE 100 dividends of £77bn this year
Last year, dividends paid by FTSE 100 companies totalled £61.5bn, a steep decline of £23.7bn from the peak £85.2bn paid in 2018. The reason for 2020’s dividend slump is obvious: the massive hit to company earnings caused by Covid-19 lockdowns. Happily, according to this excellent quarterly report (PDF) from investment firm AJ Bell, 2021 is set to be a much stronger year for FTSE 100 dividends.
The good news is that, as the UK economy recovers, FTSE 100 dividends are expected to rebound by a quarter (25%) this year. AJ Bell’s Dividend Dashboard report predicts total Footsie dividends (excluding special dividends) of £76.9bn. That’s an increase of £15.4bn on 2020’s total. This equates to a 3.7% dividend yield for the UK’s blue-chip index in 2021. For me, this is a welcome source of passive income in a yield-starved world. Even better, as earnings rebound, the Footsie’s dividend-coverage ratio should improve to 1.83, its highest level since 2014.
The 10 highest Footsie yields for 2021
According to AJ Bell, these 10 shares offer the highest forecast FTSE 100 dividend yields for 2021:
| Company | Sector | Dividend yield* |
| Rio Tinto | Mining | 12.0% |
| BHP Group | Mining | 9.2% |
| Imperial Brands | Tobacco | 8.7% |
| Evraz | Mining | 8.5% |
| Persimmon | Housebuilding | 7.7% |
| Admiral Group | Insurance | 7.6% |
| M&G | Investment | 7.5% |
| British American Tobacco | Tobacco | 7.5% |
| Anglo American | Mining | 7.2% |
| Phoenix Group | Insurance | 6.9% |
| Average | 8.3% |
* 2021 forecast by AJ Bell
The first thing to note about these dividend yields is that the underlying cash payments are not guaranteed. Indeed, in response to the Covid-19 pandemic, dozens of FTSE 100 firms cut their dividends in 2020. Also, as AJ Bell cautions, “Investors will have to look carefully at the list of the highest-yielding firms, as some of them have a track record of having to cut their dividend payments when times get tough.” Generally speaking, dividend yields of 10%+ a year often don’t last, either due to falling dividends or rising share prices.
Second, I would not attempt to build a portfolio consisting solely of these 10 high-yielding FTSE 100 shares. For me, there is too much concentration — and, therefore, too little diversification — among these stocks. In fact, four of the 10 are miners, while three are financials, and two are tobacco stocks. Thus, the vast majority of these dividends would come from just three sectors. This makes for highly skewed portfolio risk — one danger well worth avoiding.
Then again, I would certainly consider adding one or more of these high-yielding FTSE 100 shares to my family portfolio. I’m always on the lookout for quality stocks to provide extra income to reinvest into yet more shares. Finally, when I retire — perhaps in five to 10 years — I look forward to living comfortably on this flood of ‘free’ cash from the Footsie!
