Nine FTSE heroes with a bumper yield

As Brexit uncertainty keeps UK shares in the doldrums, some large firms are paying generous dividends, says

Britain’s blue-chip index, the FTSE 100, turned 35 years old at the start of the year and, despite its current lacklustre valuation, a handful of the index’s longest-serving members are now tempting investors with attractive dividends.

Brexit uncertainty has kept British share prices lower compared with other global markets since June 2016. Since the referendum, the FTSE 100 has made a return of 20pc, while global markets excluding the UK have made investors 43pc.

This week, Parliament shot down Theresa May’s proposed Brexit deal with the EU, casting further doubt on the short-term prospects for UK stocks. Despite this, Ritu Vohora, investment director at M&G Investments, a fund house, said the British stock market is now cheap and some of the biggest firms offer attractive yields for income investors.

The FTSE 100 is valued at around half that of its US equivalent, the S&P 500, and is below many European markets.

“There will be volatility ahead, but markets are pricing in a significant amount of bad news,” said Ms Vohora.

Last year, the index fell by 8.7pc, but this decline has meant the dividend yields on offer from some of the largest UK companies have become unusually high.

This is true for several of the FTSE 100’s stalwart members. Overall, despite all of the ups and downs over the past 35 years, 27 stocks that were in the index at its inception remain. Of these, 19 have never dropped out of the list of Britain’s largest 100 stocks – and today nine of these companies are paying a dividend of more than 5pc. Nick Purves, a portfolio manager at RWC, a fund house, said: “We think that this is an interesting and yet challenging time for income investors as the share prices of many large companies have declined markedly. As a result, many now offer temptingly high dividend yields.”

However, these high yields carry risk, even from companies that have remained in the index since inception.

Of the FTSE 100 ever-presents, British American Tobacco has the largest dividend yield, at 7.6pc.

A stock-market darling for much of this century, the stock rose 3,500pc between January 2000 to its peak in May 2017, but has had a tough 18 months since, down 51.5pc.

And Mr Purves warned that, while the dividend may look attractive, it is more precarious than it may seem.

Tobacco companies have been extremely profitable as they have been able to continually increase prices, but are now “overearning”, and will eventually have to cut profit margins, he predicted.

Government crackdowns, increased awareness of the dangers of smoking and the rising popularity of products such as vapes have all seen cigarette sales fall, leaving the tobacco industry in decline.

“We think, therefore, that at some point there is a significant risk of a dividend reset,” said Mr Purves.

Also yielding 7.6pc is retailer Marks & Spencer, currently one of the least loved stocks among professional investors.

The company has a lot of cash, meaning the dividend is likely to be sustained even if the company goes through a difficult period.

Oil giants BP and Shell round out the top five most high-yielding companies, at 6.2pc each.

Simon Gergel, manager of the Merchants Trust, said they are both large positions in his portfolio.

He argued that, with better techniques for finding and extracting oil, supply should remain strong.

Additionally, while there is a shift towards renewable energy and other eco-friendly technological advances, the world will be consuming large quantities of oil for decades into the future, Mr Gergel said.

Will Meadon, manager of the JPMorgan Claverhouse Investment Trust, also has a high weighting to the oil stocks, with nearly 10pc of his portfolio in Shell.

“The dividend of 6.2pc looks safe to us,” he said, noting that the company has cut its dividend only twice in history – at the start of both world wars.

Miner Rio Tinto, Lloyds Banking Group, commercial property owner Land Securities and pharmaceutical giant GlaxoSmithKline are the other FTSE 100 ever-presents offering investors a more-than 5pc yield.

Shell has cut its dividend only twice: at the start of both world wars