In this article, we will take a look at the 10 safest dividend stocks in the UK.
UK dividend stocks have been gaining a lot of attention from dividend investors. The UK has some of the highest-yielding dividend stocks investors can get their hands on. High-yield dividend stocks in the UK, like Glencore plc (LSE:GLEN.L), Rio Tinto Group (NYSE:RIO), and Vodafone Group Plc (NASDAQ:VOD), among others, have been tempting for investors over the past few months as income investors look for regular and certain income.
The UK market also offers several dividend investment trusts for investors — often known as “dividend heroes” — that have solid dividend growth records as well as high yields.
Dividend stocks were the winners in 2022 as investors flocked to income plays in search of some certainty and regular income checks. This year wasn’t much different as there’s a lot of uncertainty around the Federal Reserve’s future plan.
However, investors looking for high-yield dividend plays are having second thoughts when they look at surging government-bond yields. A Wall Street Journal report in March cited data from Birinyi Associates , which says that there were just 34 dividend stocks in the S&P 500 with a yield that is higher than what is offered by six-month Treasury bill as of March 12. According to Birinyi Associates, the number of dividend stocks offering better yield than the Treasury bill stood at a whopping 379 at the end of 2021. This shows the huge changes rising interest rates have introduced in the dividend investing equation for investors.
When markets are choppy and companies are laying off employees and cutting guidance left and right, it makes little sense to invest all your money in stocks hoping for a steady income from dividends. This dynamic has made cash highly attractive for highly risk-averse investors. But total risk aversion hasn’t made huge wealth any anyone. Dividend stocks made records last year and they are slated to do the same this year as well. The same WSJ report quoted data from S&P Dow Jones Indices which shows that S&P 500 dividend companies doled out a whopping $564.6 billion in dividend payments last year. The report said that based on the current dividend rates and assuming there are no membership changes in the index, these companies will set another record this year.
The report also cited Lawrence Hamtil, an investment adviser at Fortune Financial Advisors, who said that in an environment where prices are rising and preserving capital becomes more important than long-term appreciation, dividend-paying companies become more attractive.
In its 2023 outlook report on dividend stocks, Franklin Templeton Investments said that it was expecting “slow but positive growth” in 2023. The firm said that as a “patient” and “conservative” dividend investor it will focus on companies that can raise prices to offset inflationary pressures. The firm said it likes financials and also expects “energy to be a strong contributor to dividend returns given just how robust the energy sector is and the financial strength that some of those companies display.”
The firm said it likes dividend stocks with payout ratios in the range of 40%–50% since such companies often retain “significant amounts of their earnings to fund growth and, importantly, to provide a margin of safety in challenging times.”
Asset management firm Nuveen in February 2023 published an excellent report that shows with data how dividend investing has been a viable option for investors during troubled times (recession, rising interest rates, etc.). Here’s what the report said:
“Global dividend growth companies outperformed their non-dividend-paying counterparts during monthly periods of rising volatility, as measured by the CBOE Volatility Index (VIX). With higher interest rates and inflationary pressures — along with heightened volatility — likely to persist in the near-to-medium term, firms with strong capital flexibility and the financial strength to support dividend growth can provide an attractive source of income and the potential to protect against such turbulence.”
While the firm said at the time that 2023 would bring challenges for the market, it still expected dividend growth. However, investors interested in the UK dividend market should pay attention to the special note the firm made about the European markets:
“Increased payouts are anticipated across broad global markets in 2023, with the MSCI World Index forecast to deliver 3.8% dividend growth despite a potentially troubling trifecta of reduced economic activity, ongoing inflationary pressures and further central bank tightening — all of which could hinder corporate earnings expansion. Also worth noting: most European countries, which tend to have strict dividend policies tied to a specific percentage of earnings, may be more susceptible to dividend instability amid a weak economic and corporate earnings landscape.”
Our Methodology
For this article, we primarily focused on the SPDR S&P UK Dividend Aristocrats ETF, which seeks to track the performance of the S&P UK High Yield Dividend Aristocrats Index. The ETF’s portfolio consists of UK dividend stocks that have a decent dividend growth history. We picked the top holdings of the fund for our article in addition to choosing some other stocks which have excellent dividend growth history. Some notable names in the list include British American Tobacco plc (NYSE:BTI), National Grid plc (NYSE:NGG) and The Unilever Group (NYSE:UL).
Safest Dividend Stocks in the UK
10. Intermediate Capital Group
London-based private equity investment company Intermediate Capital Group is a high-yield dividend stock that is part of the SPDR S&P UK Dividend Aristocrats ETF. In its first half results report for 2022, the company mentioned its commitment to dividends in the following words:
We remain committed to our progressive dividend policy that is linked to the profits of our FMC. In line with our stated policy that the interim dividend will equate to a third of the prior-year total, the Board has approved an interim dividend of 25.3p. We continue to make the dividend reinvestment plan available. Our balance sheet remains strong and well capitalised, with net gearing of 0.55x, total available liquidity of £1.3bn, and a net asset value per share of 658p. We have a long-term objective to have zero net gearing.
9. The Unilever Group (NYSE:UL)
Personal care and consumer products giant The Unilever Group (NYSE:UL) can be a safe dividend stock to invest in since the company has a diversified business model and its revenue streams span a variety of areas. The Unilever Group (NYSE:UL)’s payout ratio is around 56% which is considered safe when compared to its peers.
As of the end of the fourth quarter of 2022, 22 hedge funds out of the 943 funds tracked by Insider Monkey had stakes in The Unilever Group (NYSE:UL). The biggest stakeholder of The Unilever Group (NYSE:UL) during this period was Tom Russo’s Gardner Russo & Gardner which owns a $275 million stake in the company.
8. IG Group Holdings plc (LSE:IGG.L)
Financial services company IG Group Holdings plc (LSE:IGG.L) earlier this year increased its dividend. IG Group Holdings plc (LSE:IGG.L)’s payout ratio is less than 50%. It is an important holding of SPDR S&P UK Dividend Aristocrats ETF, and accounts for about 4% of the total assets of the fund.
7. Vodafone Group Plc (NASDAQ:VOD)
British telecom giant Vodafone Group Plc (NASDAQ:VOD) is a high-yield dividend stock with a yield of about 9% as of May 18. It’s a key part of the SPDR S&P UK Dividend Aristocrats ETF holdings. Vodafone Group Plc (NASDAQ:VOD) is committed to keep paying dividends but its high yield and rising debt has made some analysts concerned about its dividend safety. Nevertheless, there’s a negligible chance Vodafone Group Plc (NASDAQ:VOD) would stop paying dividends given its size and growth prospects. The worst-case scenario could be a slight cut, that too if things take a turn for the worse.
Vodafone Group Plc (NASDAQ:VOD) recently talked about its job reduction plan and cost-cutting measures in its earnings call:
“… We have planned the reduction of 11,000 roles over the next 3 years. You may have seen announcements in Germany, Italy and our HQ recently. This simplification will increase agility in our markets. The resources, it will free up will be reinvested in customer experience and in brands to support growth, which is my third priority. The turnaround of our operations in Germany, in particular, is essential to our growth. We have delivered a number of improvements to our commercial model over the last few months, but we have more work to do to restore competitiveness. To grow we’ll also scale up Vodafone business, where we have a strong position in a large and rapidly expanding market.”
6. Legal & General Group Plc (LSE:LGEN.L)
Financial services company Legal & General Group Plc (LSE:LGEN.L) upped its dividend earlier this year. Analysts foresee continued dividend growth from Legal & General Group Plc (LSE:LGEN.L) in the coming years.
Legal & General Group Plc (LSE:LGEN.L)’s management gave some very positive comments about its dividend policy:
“We continue to generate surplus capital, well in excess of our dividend, providing significant optionality for both U.K. opportunities and to expand internationally, replicating our successful model. The Board is recommending a growth rate in full year dividend of 5%, a rate which we aim to maintain to full year ’24.”
In addition to Legal & General, some other dividend stocks to watch include British American Tobacco plc (NYSE:BTI), National Grid plc (NYSE:NGG) and The Unilever Group (NYSE:UL).
5. British American Tobacco plc (NYSE:BTI)
With a dividend yield of about 8%, British American Tobacco plc (NYSE:BTI) is one of the best UK dividend stocks to buy right now. In its Q4 earnings call, British American Tobacco’s management talked about British American Tobacco plc (NYSE:BTI)’s dividend growth policy:
“Our framework includes, continuing to grow the dividend with an average pay-out ratio of 65% over the long term, maintaining leverage within our target corridor of 2 to 3 times adjusted net debt / adjusted EBITDA, potential bolt-on M&A opportunities, and share buybacks. At this time, the Board has decided to take a pragmatic approach. Given our incremental investment plans in 2023 to further accelerate our transformation and in light of the uncertain macro environment, higher interest rates, outstanding litigation, and regulatory matters, the Board has decided to prioritize strengthening the balance sheet.”
4. National Grid plc (NYSE:NGG)
UK-based multi-national utilities company National Grid plc (NYSE:NGG) accounts for about 4.2% of the total assets of the SPDR S&P UK Dividend Aristocrats ETF. National Grid plc (NYSE:NGG) has a dividend yield of over 4% as of May 18.
National Grid plc (NYSE:NGG) recently posted its earnings and also increased its dividend.
Its FY 2023 pretax profit jumped to £3.59 billion from £3.44 billion a year earlier. National Grid plc (NYSE:NGG) declared a final dividend of 37.60 pence/share, lifting the full-year payment to 55.44 pence from 50.97 pence a year earlier.
As of the end of the fourth quarter of 2022, 12 hedge funds tracked by Insider Monkey had stakes in National Grid plc (NYSE:NGG). The biggest stakeholder of National Grid plc (NYSE:NGG) in this period was Citadel Investment Group of Ken Griffin which had a $6 million stake in the company.
Here is what ClearBridge Investments SMID Cap Growth Strategy has to say about National Grid plc (NYSE:NGG) in its Q4 2021 investor letter:
“National Grid is one of the world’s largest publicly owned utilities, focused on transmission and distribution activities in electricity and gas. National Grid performed strongly during the quarter as the business continued to de-risk following prior regulatory decisions and significant M&A. The company also benefited from falling real rates, a solid set of half-year results and strong Investor Day presentations.”
3. Schroders plc (LSE:SDR.L)
British asset management company Schroders plc (LSE:SDR.L) is one of the notable names in the SPDR S&P UK Dividend Aristocrats ETF holdings. Schroders plc (LSE:SDR.L)’s Schroder Income Growth Fund has upped its dividends for 27 straight years. Year to date Schroders plc (LSE:SDR.L) is up about 5.7%.
2. Hargreaves Lansdown plc (LSE:HL.L)
British financial services company Hargreaves Lansdown plc (LSE:HL.L) is a part of the SPDR S&P UK Dividend Aristocrats ETF. Hargreaves Lansdown’s management during the company’s Q4 earnings call touched up the topic of dividends:
“The tough external environment impacted net new business in the period, but clients have used our diversified service to continue to save during this time, driving £1.6 billion of net inflows. And this, together with market movements drove AUA to £127.1 billion, up 2.7% since our full year results. The diversity of our business model is reflected in our financial performance with record revenue hitting £350 million, up 20% on 2021 and profit hitting £198 million, also a record for a first half, and our interim dividend has risen by 3%.”
1. BAE Systems plc (LSE:BA.L)
Defense contractor BAE Systems plc (LSE:BA.L) is an important holding of the SPDR S&P UK Dividend Aristocrats ETF. While the company suspended its dividend payments in 2020, its growth prospects look strong for the future. BAE Systems plc (LSE:BA.L) has a payout ratio of about 50% and the company plans to buy back GBP 1.5 billion of its own shares over the next 3 years.
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Disclosure: None. 10 Safest Dividend Stocks in the UK is originally published on Insider Monkey.
