From stagnant growth to recession, the UK economy’s faced its fair share of challenges in recent years.
However, the most notable has been double-digit inflation.
In a bid to cool runaway prices, the Bank of England (BoE) raised interest rates to 5.25%, encouraging us to save instead of spend and help bring inflation back down to its 2% target – which it’s now reached.
Higher interest rates mean you can earn reasonable returns by just holding cash.
But with inflation falling and the economic outlook brightening, interest cuts this year are looking more likely. And that would typically mean income from cash deposits are peaking.
Now could be a good time to start looking elsewhere for returns – just make sure you’ve got your rainy-day emergency fund covered first.
There are a handful of UK companies offering attractive returns in the form of dividends, with the added benefit of capital gains if the underlying business performs well. Of course, returns and income are never guaranteed.
This impressive dividend-paying potential is a key attraction to the UK stock market. There are plenty of mature companies boasting strong dividend cover and the potential for income to grow over the long term.
Some UK companies have managed to raise their annual dividend payments for at least the past 25 years, earning them the title of ‘dividend aristocrats’.
Here’s a closer look at three promising dividend aristocrats.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future and ratios shouldn’t be looked at on their own. Remember, yields are variable and no dividend is ever guaranteed.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Primary Health Properties
Primary Health Properties (PHP) invests in purpose-built doctor’s surgeries and has a long track record of delivering results for shareholders.
The backlog of procedures in the NHS and the needs of an ageing population means investment in primary care facilities isn't going anywhere.
As a REIT (real estate investment trust), PHP has to pay out the vast majority of its profits. That translates to a forward dividend yield of 7.5%.
PHP’s asset base is relatively defensive in the context of today’s uncertain macroeconomic environment. Rent collection rates were 99% in both 2022 and 2023, with 2024 rates trending in the same direction.
And, with 89% of the group's rent roll funded by the NHS or its Irish equivalent, the group's tenants are lower risk.
There are some reasons for caution though.
Loan-to-value (LTV) is high by industry standards and has risen over the past year.
The group's REIT structure means it's difficult for them to fund growth organically. This means investors are likely to be asked to fork out extra cash from time-to-time, especially as debt financing remains expensive in the current high interest rate environment.
PHP’s valuation looks undemanding and the prospective dividend yield is attractive. However, there’s a risk that its property values fall if interest rates stay higher for longer.
Legal & General
Legal & General (L&G) is an insurance and investment juggernaut, with operations in pretty much every service within those buckets.
Full-year operating profit of £1.7bn was broadly flat year-on-year, but was around 5% below market expectations. A strong performance in the Retirement business was offset by lower profits in Investment Management.
The group has a new CEO and refreshed strategy that looks to streamline the asset management arm. It’s an area where performance has been lacklustre of late, with higher interest rates bringing down assets under management.
But for L&G it’s the retirement and annuity business that generates the bulk of its profit. It’s a market that’s hot right now and we see L&G as well placed to take advantage.
Sentiment towards the sector is a little weak currently. Regardless, we think the long-term outlook is favourable, with the contractual service margin (a measure of potential future profit) even exceeding forecasts.
There’s also a strong balance sheet to help ride out tough times. And with capital generation exceeding dividend payouts, the prospective dividend yield of 9.4% looks well supported.
The valuation is in line with peers, which doesn’t look too demanding to us given the number of strings to L&G’s bow. Increasing overseas exposure looks like the obvious route to growth, but brings execution risks along with it.
National Grid
National Grid is a vital business. It owns and operates essential energy infrastructure across the UK and north-east US.
As the energy landscape changes, National Grid’s attempting to plant itself at the centre of the revolution. There’s a five-year plan in place to invest around £60bn in building out its energy infrastructure. To help fund these plans, the group’s divesting a number of its gas assets and has recently raised around £7bn from issuing new equity.
In return for investing billions in maintaining and upgrading its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets.
This translates into relatively predictable revenue and underlying operating profit, the latter of which grew by 6% to £4.8bn last year, ignoring exchange rate impacts.
This predictability of cash flows helps underpin the group’s dividend-paying potential, with a respectable prospective yield of 5.4% on offer.
The regulatory environment can be a double-edged sword though. If consumers are struggling to pay their bills, the regulator could clamp down on the group’s profits.
We commend National Grid’s willingness to pounce on shifting energy trends. The sheer scale of the investment plans bring with it some execution risk. But should management pull it off, we think investors will likely be rewarded for their patience.
As always though, nothing is guaranteed and there’s likely to be some volatility along the way.
Top 10 highest-yielding FTSE 100 shares
12-month forward dividend yield | |
|---|---|
Phoenix Group | 11.09% |
British American Tobacco | 10.15% |
M&G | 10.07% |
Legal & General | 8.72% |
Imperial Brands | 8.35% |
HSBC Holdings | 8.12% |
Aviva | 7.55% |
Vodafone Group | 7.12% |
Taylor Wimpey | 6.44% |
Rio Tinto | 6.19% |
Investing for income isn’t just about looking for the highest-yielding shares. There’s a lot more to it than that and you shouldn’t make decisions based off just one valuation metric alone – like a share’s yield.
Even when you’re on the hunt for income, holding a diversified portfolio is essential. Those looking to cherry pick the top yielders in any index should spread their money across different industries, parts of the world and types of investments, like bonds. But also look at other metrics to get an overall view on a company.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.