FTSE 100 dividend payouts faltered during the pandemic. But now long-term confidence is returning, it looks increasingly like this year could deliver the best dividend returns since 2018.
Today, I’m looking at the five UK dividend shares with the biggest FTSE 100 yields, all at 8%, or better.
Persimmon leads the way with an 11% yield. Except for 2019, Persimmon has kept its dividend steady. However, the big yield has included a chunk of surplus capital being returned to shareholders.
The housing market appears strong so far in 2022. But that’s before inflation and rising interest rates have had a chance to kick in. So there’s surely some threat this year, based on our economic outlook. And earnings in the sector can be cyclical.
But the UK’s long-term housing shortage means Persimmon remains a ‘hold’ in my portfolio.
Mining sector cash
With a predicted yield of 10%, Rio Tinto is in second place. The share price has barely moved over the past 12 months. But several years of growing earnings have helped push the dividend up to current levels.
The P/E looks low at around six, but that can be misleading. The mining sector is very cyclical, and stocks tend to look cheap around earnings peaks.
Still, I think commodities prices could remain strong for some time yet. And Rio could well be one of the best UK dividend shares around. I’m thinking of buying.
The financial services and asset management business can generate healthy cash flow to pay dividends. Right now, M&G looks good with a dividend yield of 8.5%.
There is a possibility of future stock market weakness, perhaps stemming from inflation and economic pressures. In turn, that could lead to investors withdrawing assets. Should that happen, M&G’s earnings might well be dented.
But the company is targeting £2.5bn in operating capital generation over the next three years. If it achieves that, I think the dividend should be safe. It’s another on my list.
Sector diversification
Imperial Brands has been among the top UK dividend shares for years. Right now we’re looking at a forecast yield of 8.3%. It should be well covered by earnings too.
One downside is that this is supposedly a dying business, as smoking becomes increasingly unacceptable. Earnings have edged down a little in the past couple of years too. But with growing trends in alternative ways of consuming tobacco, I reckon the Imperial Brands dividends should have a good few years left in them.
Finally, I come to Phoenix Group Holdings, with a predicted dividend yield bang on 8%. I like insurance, and currently own Aviva. I want another in the sector, and Phoenix is an option.
The company acquires life insurance and pension funds which are closed to new business, and manages those. I see that as a good way to spread, and reduce, the risk.
How the sector will handle today’s high-inflation economy is unknown, so there’s risk there. But the insurance business can generate strong cash flow over the long term.
UK dividend shares portfolio
Looking at these top UK dividend shares, I’m seeing good diversification across sectors. I do like the idea of spreading my 2022 ISA cash across the five.