American business tycoon John D Rockefeller once admitted, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Dividends are regular cash payouts made by companies to their shareholders. Typically, dividends are distributed either quarterly or half-yearly. For me, reliable FTSE 100 dividends are the closest thing to free money that I’ve ever enjoyed. And, very importantly, dividends (and dividend reinvestment) may account for as much as half (50%) of long-term returns from stocks and shares.
FTSE 100 dividends are set to soar
As Covid-19 spread worldwide in 2020, FTSE 100 dividends slumped. The good news is that cash payouts are set to rebound in 2021, according to this new report (PDF) from investment firm AJ Bell. (Every quarter, AJ Bell’s excellent Dividend Dashboard report forecasts UK dividends for the current and coming year.)
According to Q2’s report, FTSE 100 dividends (excluding special dividends) are expected to grow by a quarter (25%) this year. Total forecast Footsie dividends of £76.9bn in 2021 equate to a 3.7% dividend yield for the UK’s main market index. That’s a £15.4bn improvement on the £61.5bn paid out in 2020. What’s more, as company earnings recover, dividend cover should improve to 1.83 — its highest level since 2014. Dividend cover expresses the ratio of company earnings to dividends paid out. The higher this ratio, the more well-covered and secure dividends are.
In addition, AJ Bell’s latest update reveals no shortage of high-yielding FTSE 100 dividend stocks. Indeed, nine Footsie firms have a forecast dividend yield of more than 7% a year. For me, few other assets offer such tempting income streams.
The Footsie’s five biggest dividend payers
With almost £77bn of FTSE 100 dividends expected to be paid out this year, I’m keen to grab my fair share. Indeed, mega-cap dividends are the main source of passive income for my family portfolio. Hence, I’m always looking out for strong companies able to pay hefty dividends to their owners. Then again, just 10 companies are expected to generate more than half (52%) of total blue-chip dividends this year. Similarly, the top 20 are expected to generate more than seven-tenths (71%) of 2021’s total pay-out.
According to AJ Bell, these five Footsie firms are forecast to pay the largest dividends by size in 2021:
| Company | 2021 Dividend* | 2021 Dividend yield* |
| Rio Tinto | £8.73bn | 12.0% |
| British American Tobacco | £4.84bn | 7.5% |
| Royal Dutch Shell | £4.04bn | 3.6% |
| BHP Group | £3.98bn | 9.2% |
| Unilever | £3.86bn | 3.4% |
*Estimated
As you can see, AJ Bell expects each of these five FTSE 100 firms to pay yearly dividends of £3.8bn+ this year. The biggest, global mining giant Rio Tinto, is forecast to return over £8.7bn in cash to shareholders. Then again, history suggests that very high dividend yields — typically, in excess of 10% a year — are rarely sustainable. Thus, Rio may have to cut its payout if metals prices fall back (just as it did in 2016).
One warning about dividends
Like Rockefeller, I love seeing my dividends coming in, but I also know that these company distributions are by no means guaranteed. Indeed, three of the five FTSE 100 companies in the above table have cut their dividends in the past decade. As well as Rio in 2016, Shell cut last year and BHP cut in 2016 and 2020. Therefore, I will never rely solely on share dividends for my entire income. Otherwise, a sudden shock could leave me rather short of cash!