OPINION: Are average dividend returns of 7pc worth pursuing?  

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Financial expert Peter Sharkey examines if it is worth investing in dividends from a number of high-performing companies - Credit: Getty Images/iStockphoto

I sit on the board of a private organisation that last week published its annual results detailing activity over the previous 12 months and converting it into pounds and pence.  

After receiving the accounts by email, I raised one point with the chief financial officer regarding the interest earned on a substantial sum of money sitting in a curiously-named ‘High-Interest Bank Account’ at a well-known high street bank. The annual interest earned on this deposit amounted to less than £10.  

“Not great,” confirmed the finance man, who added: “But we would need over a million on account to receive anything decent.” 

Fair enough, but some days following this discussion the negligible interest earned on a hefty wedge of money prompted me to pore over a list of the UK’s largest publicly-quoted companies published weekly in one of the Sunday papers.  

There are 200 companies on the list, almost one quarter (47) of which are currently paying shareholders at least 4.5pc in annual dividends. This includes 15 companies expected to distribute payments of 7pc or more to their shareholders.  

As the chart below shows, we’re not talking tiddlers here – some of the UK’s largest corporate entities appear on the list. Average dividends scheduled to be paid by this group of randomly-selected companies amount to more than 7pc – better than you will find at a high street bank.   

High yielding companies 

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Company                           Projected dividend (%)        Company value (£ billion) 

Abrdn                                                9.9                                           3.2 

Barratt Developments                    7.7                                           4.4 

Glaxo Smithkline (GSK)                 6.2                                           57.1 

ITV                                                     7.8                                           2.6 

J Sainsbury                                      6.5                                           4.8 

National Grid                                    4.5                                          41.9 

Vodafone                                          6.5                                          32.2

Source: Sunday Times 28 August 2022 

Before you rush out and buy these shares, however, a word of caution. Dividends are not guaranteed.  

Over the past couple of years in particular, dividend payments have occasionally been cancelled at a moment’s notice as companies scrambled to retain cash rather than distribute it to shareholders. Furthermore, share prices can be extraordinarily volatile. You may, for example, buy a share for £1 which is forecast to pay a dividend of 8p, but if the share price falls to 80p, you may feel you would have been better off making your investment elsewhere.  

It’s also worth noting that experienced investors often warn against investing in high-yielding shares as their eye-catching returns can be an indication that all is not well within the company paying them.  

Take Abrdn, the company formerly known as Standard Life Aberdeen. Since undergoing a rebrand in July 2021 the company’s shares have fallen by 42pc. Yet, the commitment to paying a dividend of almost 10pc remains despite a recent £64 million fall in six-month pre-tax profits – a “chronic underperformance” according to investment magazine Investors’ Chronicle

It’s also worth noting that Abrdn’s dividend cover is less than one. In other words, its earnings are not currently covering the full cost of its dividend payments. Such arrangements are often a trigger for alarm bells to ring among experienced investors. 

A year ago, had you bought shares in  Vodafone, its subsequent stock market performance would decidedly underwhelm. In the year to August 31, 2022, its share price went from £1.15 to, ahem, £1.15p – i.e. nowhere. On the plus side, the shares have not lost money and have been attractive for income-seeking investors, rewarding them with a 6.5pc annual dividend payout. Once again, however, the payment is not fully covered by earnings, a situation that some investors consider a little too unpredictable.

By contrast, National Grid’s shares have risen by 20pc over the past 12 months. The company pays a solid 4.5pc dividend which is comfortably covered by earnings, though it is in the throes of reinventing itself as a renewable energy outfit. Its green credentials received a significant boost earlier this year when it avoided the windfall tax levied on oil and gas companies including BP and Shell.  

The company is focusing on connecting offshore wind farms to the UK electricity grid at an eye-watering cost of £54 billion as it seeks to achieve net-zero. This is a laudable aim, but National Grid’s debt has risen by £15 billion over the past two years to £ 44 billion, which could cause the attractive dividend to come under pressure.  

There’s no indication that that might happen, but investors prepared to delve into the stock market in pursuit of dividend income must be prepared to consider every eventuality, however remote it may currently appear.  

For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.