FTSE 100 dividends close to pre-pandemic peak but stagflation could spoil the party

The FTSE 100 has seen its first year of dividend growth since 2018 and is on track to deliver a 4.1% yield in 2021. But with the majority of that coming from just 10 stocks the pressure is on to avoid any headwinds that could send them off course.

According to AJ Bell’s latest Dividend Monitor, Rio Tinto and BHP Billiton are the two companies generating the lion’s share of the dividend increase.

“Rio Tinto and BHP Billiton are the top two, so income-seekers may be concerned by autumn’s slump in the iron ore price amid concerns over economic growth in China in particular,” says Russ Mould, investment director at AJ Bell.

“Miners offer five of the six biggest forecast dividend increases in 2021 but that number dwindles to just two in 2022, when reductions at several resources plays hold back the overall forecast for the FTSE 100.”

Inflation or stagflation?

Investors will, however, have concerns over the price increases across the board that are hampering the growth of economies worldwide.

“The dial on inflation has been nudged up yet another notch with oil prices jumping back up to three-year highs. Brent crude surged by more than 3% edging towards $82 a barrel after OPEC+ decided not to turn on the taps more fully,” says Hargreaves Lansdown senior investment and markets analyst Susannah Streeter.

“With price increases slamming economies from all directions, concerns about stagflation seem to have turned from niggling worries to an anxiety attack, with US indices falling sharply in early trading [on 4 October]. The FTSE 100 fell into the red late in the day, heading back towards the psychologically significant 7,000 mark, as investor sentiment turned more negative.”

Mould agrees that a renewed drop in economic activity could still pose a big risk to dividend forecasts.

“Analysts currently believe that 2022’s (adjusted) net profits will exceed not only the pre-pandemic peaks of 2018 but the current all-time high of 2011, when commodity prices were roaring higher, and miners and oil producers generated 42% of the FTSE 100’s profits between them,” he explains.

“Miners, oils and financials are expected to generate more than 80% of 2021’s expected £128bn increase in pre-tax income and each of those three is sensitive to global economic growth to some degree or other.”

He adds that should the economy hinder progress, then the earnings forecasts and dividend payment estimates could be exposed to the downside.

Streeter points out that the labour shortages, coupled with supply chain issues, have fuelled concerns among investors about a drag on the overall economic recovery.

“Central bankers could be forgiven for experiencing a big dose of vertigo as they balance on the tricky tightrope of trying to keep a lid on inflation, while attempting to keep monetary stimulus loose enough not to choke off growth,” she says.

Keep an eye on the prize

Seasoned income investors will be all too aware that high-yielding companies tend to chop dividend payments when the going gets tough and will be keeping an eye on the FTSE 100’s top-paying stocks.

“Forecast yields of more than 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. All were forecast to generate a yield in excess of 10% at one stage or another and all cut the dividend instead,” Mould notes.

“BHP’s likely disappearance from the FTSE 100 in 2022, when it adopts a standard rather than a premium listing and makes its primary base Australia, is another factor for investors to ponder, at least if they are seeking to glean yield from index-tracking funds.”

By Jenny Turton, 5 Oct 21