When the FTSE 100 hit a record high in February, I was hoping for the start of a lengthy bull run. So it’s hard not to be left disappointed by another weak performance by the UK’s top shares his year. The underperformance of our biggest index does have a few silver linings however, and one of those is bumper dividends. As share prices go down, dividend yields go up.
And just recently, a few big hitters have joined the 7% yield club.
Big payouts
The 7% mark is roughly the average return of the FTSE 100 index stretching back to its inception in 1984, so to get that return from dividends alone is rare. Remember, I’d also hope for a rise in share price to make my returns even higher.
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This rare chance might not last for long either. It’s unusual to see 12 FTSE 100 firms offering a dividend yield over 7%. Nor do I expect the Footsie’s price-to-earnings ratio to stay below 11 for much longer.
The three stocks to catch my eye offer 7.02%, 7.51% and 8.19% dividend yields, and each only passed the 7% barrier recently. Now, before I look at these shares and their dividend forecasts, I’ll offer a word of caution.
Buying for big yields isn’t always straightforward. A return north of 7% on my investment sounds terrific, but dividend yield is a backwards-facing measure and is based on earnings and dividends from the last year. So, the yield is a guide for the future, not a guarantee.
What’s more useful is the dividend forecast. This forward facing measure tells me yields for upcoming years and gives me an idea of what kind of percentage return I might expect. However, this isn’t based on earnings, it’s based on the predictions of analysts. The uncertainty of these forecasts is a risk to bear in mind too.
Adding to my watchlist
To take one example, the housebuilder Persimmon boasted a 15% dividend yield last year. Alas, if I’d recklessly opened a large position then I might be unhappy after seeing the yield drop to 5% this year.
Now, with some of the risks of dividend yields in mind, let’s look at the numbers for those three companies. All forecasts are based on the share price as I write so could change very quickly.
| Dividend Yield | 2024 Forecast | 2025 Forecast | |
| HSBC | 7.02% | 13.50% | 10.90% |
| NatWest | 7.51% | 7.88% | 8.88% |
| St James’s Place | 8.19% | 7.97% | 7.32% |
First off, I’ll mention that I’m not considering NatWest. The banking group ruined a couple of impressive years with the Nigel Farage debanking row. That led to negative publicity and a lot of people, including me, questioning its governance. The part-government-owned bank is one I’m avoiding.
The other two firms pique my interest though. Global banking group HSBC is taking advantage of high interest rates to deliver big earnings, although the high 2024 yield will be driven by a special dividend through a sale in its Canadian operations.
Wealth management firm St James’s Place has seen its share price falling 43% over the last six months and it’s near a 10-year low. This drastic fall may present an opportunity to pick up a bargain on the cheap. I’m adding both to my watchlist.
