The FTSE 100‘s a bit wobbly as people fear the upcoming budget. But it’s still holding up over 8,000 points, and I think the future for dividends might never have looked better.
But wait, aren’t FTSE 100 dividend forecasts being scaled back in the face of our slow economy? Well, yes. The all-time record dividend payout of £85.2bn came in 2018. And as we’ve recovered from the Covid crash, it’s looked set to be beaten a couple of times.
But each year falls short. And with only a 1% growth in dividend cash forecast for 2024, it looks like we’ll still be some way from it this year. A 1% rise isn’t even close to keeping dividends up with inflation.
Beating the past
Still, some of the shortfall in dividends is due to something that’s actually good. Judging their stock prices to be too low, a lot of firms have been returning cash by way of share buybacks instead.
That won’t put cash straight into shareholders’ pockets. But with fewer shares in circulation, what it should do is boost future earnings and dividends per share.
And, according to AJ Bell‘s most recent Dividend Dashboard, we could be on for a 7% jump in dividend payments in 2025. That could take us close to the 2018 record. Can 2026 then get us into new record territory? I think there has to be a very good chance.
I know we’ve been disappointed by total dividend forecasts being scaled back. But I want to take a look at a dividend stock I’m considering for my investments.
Dividend favourite
I’m talking about British American Tobacco (LSE: BATS), with a forecast yield of 8.3%. And that’s even after the share price has seen a bit of a resurgence this year.
As well as the fat yield, I like a few other things about the British American dividend. One is that cover by earnings looks looks strong enough. We’re looking at about 1.3 times-1.35 times over the next three years.
In some industries with more uncertainties, that could be a bit thin. But in this case it’s a business with a fairly clear view of likely revenues and costs. And that’s another thing I like.
And I particularly like the fact that broker forecasts show earnings per share (EPS) and dividends continuing to rise in the next three years. If they’re right, EPS would increase by 14% between 2024 and 2026, with dividend cash up 9%.
The big risk for British American Tobacco, of course, is the tobacco part. Will the world some day shun it and consign it to history? Some think it will, some think British American can keep going with new products.
Buybacks too
Oh, and on top of its dividend payouts, British American is also buying back its own shares. And buybacks, or at least the end of them, are a key thing that I think could help push us into a great decade for dividend investors.
When share prices have recovered enough for buybacks to make less sense, it could mean more cash for dividends.
