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The last few years have been great for dividend stock investors.
Every year, the forecasts of FTSE 100 Dividend payments have been growing. Well, I say growing, but the growth rate is slowing.
I have read the latest Dividend panel of an investment services company AJ Bell (LSE: AJB). And I see that the dividend forecasts for 2024 and 2025 are £10.3bn lower than a year ago. That's a drop of 11.5%.
Performance drop
The FTSE 100 yield has fallen to 3.8% by 2024 and 4.1% by 2025.
Not long ago, the City expected 2024 ordinary dividends to surpass the record set in 2018. But the latest consensus of £79.7bn would be 6.5% below the £85.2bn paid that year.
Still, we could be on the verge of hitting a new record in 2025… unless forecasts are lowered a bit more over the next 12 months.
Darkness?
Is this bad news for dividend investors? No. I still think we're in a golden age for dividend stocks.
Part of the decline appears to be due to companies buying back shares as a way to recoup excess cash. At a time when stock prices are historically low, I think it's a sensible thing to do.
Russ Mold, investment director at AJ Bell, said: “The value of buybacks announced by 25 FTSE 100 members so far in 2024 currently stands at £27bn, to perhaps give the FTSE 100 a platform to reach 2022's all-time high of £58.2bn, or at least the provisional total of 2023 £52 billion.“
Buybacks added to ordinary dividends suggest an overall cash yield of 5.3% for the FTSE 100 stock.
Economy
While I remain bullish on UK dividend stocks, I see some reasons to be cautious. Surely some of the reductions will be due to the economy.
Nobody thought inflation would rise so much. Or interest rates would rise so far and stay that way for so long.
Lower free spending by the UK population translates into lower corporate profits and less cash available for dividends.
Future
What does the broader future look like for UK shares? I expect a lot of it to be driven by market sentiment.
And what better way to see where that's going than to take a look at the prospects of one investment firm, AJ Bell herself?
Broker forecasts suggest that we should see earnings per share (EPS) grow 25% between 2023 and 2026. And that would be due to increasing revenue from the company's business services.
We could see a 22% dividend increase at the same time, and the yield would rise to over 4%. Hmmm, and the stock looks attractive… a P/E of 16, which will fall to 14 in 2026, doesn't seem exaggerated at all.
Maybe I should consider adding AJ Bell to my Stocks and Shares ISA.
Bullish
Anyway, over the next 10 years, I think FTSE 100 dividends could beat that 2018 record… several times over. But that's just a guess, just for fun.
We could still see problems in the short term, if dividend cash were to decline. And the trend of the forecasts is downward, for now.
But UK dividend stocks are still the best for me.
