Conflict in the Middle East has caused the FTSE 100 to plunge this year, but analysts remain bullish on the potential for dividend payouts, according to AJ Bell’s latest Dividend Dashboard.
The FTSE 100 is down more than 10% from its previous high before the conflict in the Middle East, AJ Bell’s investment director Russ Mould noted, which plunged it firmly into correction territory.
Worsening macroeconomic outlooks and potential declines in corporate profit forecasts could all lead to companies reassessing their buyback plans, Mould noted.
“Any sustained increase in oil and gas prices would be a danger, given the impact on profit margins thanks to higher input costs and also potentially revenues for many industries.”
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On top of this, because of strong returns from the FTSE 100 this decade (up 68.1% since 31 December 2019), the forward yield for many companies has fallen.
“Quite simply, the index has gone up faster than dividends, so the available dividend yield has contracted,” Mould said.
Paired with the fact that there is a “fair degree of concentration risk” within the index, as 10 companies are expected to pay out 52% of the forecasted total for 2025, and some investors may be of a more nervous disposition.
However, “consensus analysts’ estimates suggest that 2018’s all-time high FTSE 100 dividend estimate of £85.2bn will finally be exceeded in each of this year and the next.”
Share buybacks could further supplement this, with the FTSE 100 already declaring £29.4bn worth of buybacks this year. This is slightly lower than the £38.9bn outlined by this time last year, but analysts expect that 2026’s final buyback total could reach £117.4bn.
Moreover, profit forecasts are yet to show any signs of strain, with analysts upgrading their profit forecasts to £264bn for 2026 and £288bn for 2027, compared to a peak of £231bn in 2022.
Mould said investors with a more nervous disposition may wish to consider the earnings cover for the FTSE 100 forecasted dividends.
“For 2026 and 2027, analysts see earnings cover coming in at 2.14 times and 2.21 times, respectively.
“This is not as high as 2022’s reassuring 2.55 times, but it does still exceed 2.00 times, the mark traditionally seen as one that offers comfort and protection in the event of any unforeseen economic setback.”
However, he warned that with companies such as Mondi and Diageo already announcing dividend cuts this year, investors will need to keep an eye on balance sheets to see how secure dividends may be in the event of a sustained economic downturn.
The highest expected dividend yield from an FTSE 100 company is Legal & General at 8.8%, followed by Standard Life at 8.2%.
The table below shows the 10 FTSE 100 companies with the largest expected dividend yield.
The average yield on this group may compare less favourably to gilts, with the 10-year gilt currently hovering around 5%, its highest level since 2008, according to Mould.
“A sustained increase in the 10-year gilt yield could tempt some investors to look toward government bonds and away from equities in their search for reliable income,” Mould noted.
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However, Mould warned that investors should consider how inflation could impact gilt coupons, as well as the potential for capital gains and dividends from equities.
On top of this, a former “rule of thumb” argues that any dividend yield that is more than double the risk-free rate (the 10-year yield) may be too good to be true.
Mould said: “For the record, not one FTSE 100 stock currently offers a forecast dividend yield of 10% or more, or twice the 5% 10-year gilt yield that prevails at the time of writing, and that is probably no bad thing.”
“A really fat dividend yield is not necessarily a good sign anyway, as it can mean that investors are demanding such a juicy return to compensate themselves for what they see as substantial risks at a company, either in terms of its business model, balance sheet or boardroom acumen,” Mould added.
For example, companies such as Vodafone, Marks & Spencer, and Shell have all previously offered yields of more than 10%, before delivering “nothing of the sort”, according to the AJ Bell analyst.
Instead, investors may be better off searching for the stocks which have consistently grown their dividends. The table below shows the 16 FTSE 100 stocks which have grown their dividend unbroken for the past decade.
On average, this grouping has outperformed the FTSE 100 in CAGR and total return terms since 2016, but their expected dividend growth is slightly slower than the FTSE 100 average.
Mould concluded: “Moreover, only half of the 16 could be found in the FTSE 100 a decade ago. Any investor looking for the next generation of dividend growth winners may therefore need to dig into the FTSE 250 (or below).”
