As it stands, a very respectable 34% of UK 100 blue-chips offer income-seeking investors a projected dividend yield of 4% or better. The Bank of England may just have raised interest rates for the first time in a  decade, but reversing last summer’s Brexit referendum emergency 25bp cut to return to a UK base interest rate of 0.5% is nothing to get excited about for your cash on deposit at the bank. With bonds still not offering investors much either, can you really afford to ignore the plethora of UK equities offering up to 8x (in some case more) what you can get from the most generous high street bank?

In fact, I’m being conservative, not even doing the index justice. The statistics are even better than that! One UK Index name offers a yield of over 7%, 6 names offer 6%+, 22 offer 5%+, as mentioned 34 offer 4%+, while 45 could deliver returns of 3%. That’s 14, 12, 10, 8 and 6x what banks will offer you, respectively. In fact, with 75% of the UK 100 offering income of 2%+ (4x bank interest) and 92% paying more than 1%, you’d be particularly unlucky if you randomly picked a UK Index stock that didn’t beat the bank.

This is in spite of the UK UK Index having rallied 5.8% this year to fresh record highs, suggesting companies are doing well, generating sufficient profits to keep growing payments to reward loyal investors. If you are a long-term holder buying in now, assuming pay-outs keep growing, you may even be able to lock-in an even bigger yield. It’s not like a bond where the returns are fixed. If the company keeps doing well the dividend should keep rising. If it does really well the company could even return more significant cash via a special dividend. And if a company keeps doing well the shares should do well too, giving you both income and a capital return. Double good!

To remain balanced, dividends are never guaranteed. Even oil major BP had to suspend its stable quarterly pay-outs after the 2010 Gulf of Mexico disaster. Banks did the same during the financial crisis and Miners during their own China inspired downturn. Others have had to do the same following profits warnings to preserve cash. Which usually sees the share price fall too, meaning a decline in the value of your capital and the loss (hopefully temporary) of income. Equities aren’t without risk and neither is dividend investing. But these examples are thankfully rare and there are things you can do to reduce the chance of it happening.

Diversifying helps. One sector may well offer very attractive returns, but if trouble strikes one company the sector risks being tarred with the same brush. Spreading exposure across several sectors is a way of protecting yourself. Forward or estimated yields are more important than historical yields. You can’t buy past payments and there’s no guarantee a company will pay the same again. A prior year’s yield may be artificially inflated by a one-off special dividend. Be wary of big changes. Some investors look forward one year, others ahead by two or three. The more the better.

Share price trends are also important as a big yield might be due to a falling share price because trouble is brewing. Lastly, a handful of financial ratios can help you filter for dividends deemed safer, unlikely to be cut even if times get hard. There is still no certainty that consensus will be right, or that a company won’t have to cut its dividend, but these metrics can be used to boost confidence in your decision.

‘Dividend cover’ is a company’s ability to pay dividends; analyst expectations of how much profit a company will make versus the dividends it is expected to pay. Essentially how many times the dividend can be covered/paid from the profits generated. Think of it as wiggle room before a dividend is in jeopardy. The higher the cover the less chance the dividend will need to be reduced, or cut. Companies will aim to sustain a multiple of 2x cover. Numbers consistently below 1.5x may mean a company struggles to pay out as much (maybe even at all) in future years. Some investors prefer multiples of 3x, others even higher, for certainty and the possibility that the company can even increase future payments.

With 40% of the UK 100 suggesting cover of 1.5x or less, not all blue-chip dividends might be as safe as you think. Covers range from a weak 0.5x to an impressive 15.3x for 2017. For the years ahead it’s 0.7-15.8x for 2018 and 0.9-13.8x for 2019. With 2017 nearly over, note 68% of UK 100 having what is regarded as a sustainable dividend cover of at least 1.5x and 50-55% with more than 2x. Whilst not majorly different to the 75% of stocks yielding 2%+ and 45% yielding 3%+, it does imply that filtering for the right names, with better cover, offers another layer of confidence to your investment and trading decisions. Consider it short term homework for long term peace of mind.

Now, having avoided mentioning any individual stock names for seven whole paragraphs, it’s time to reveal that the biggest yields are Centrica, SSE, Taylor Wimpey and Lloyds Banking, while the biggest dividend covers are Shire, NMC Health, Ashtead and IAG. But that’s only half the story. For the full data list click here so you can do your homework, choose the best stocks, and benefit from receiving our renowned research and helpful analysis going forward.

Have a great weekend,

Mike van Dulken, Head of Research, 3 Nov 17.