Dividends from FTSE 100 companies expected to rise but investors should watch out for low cover

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Dividends will be high, but investors should be wary of unsustainable yields (Source: Getty)

Companies in the FTSE 100 are forecast to pay out £78.4bn in dividends in 2017, according to a new report.

The total payouts are expected to be 4.6bn higher than 2016 forecasts in a report by AJ Bell, a provider of investment platforms and stockbroker services. This is equivalent to a yield of 4.6 per cent.

However, dividend cover ratio is looking low at an average of just 1.46. The ratio is a measure of how much profit is made for every £1 paid out to shareholders. AJ Bell recommends a dividend cover of at least 2 as ideal.

Only easyJet is currently expected to offer a lower dividend in 2017 than in 2016.

The firm with the highest predicted dividend yield was Taylor Wimpey, though their cover ratio is only 1.21. In fact none of the ten companies with the highest yields in 2017 will make more than £1.50 in profit for every £1 returned to shareholders.

Half of next year’s dividends are likely to be paid out by just seven companies, including HSBC, Vodafone, and Direct Line. Royal Dutch Shell is set to be the biggest contributor, accounting for £12bn.

Another seven firms are set to account for half the growth in dividends, led by BHP Billiton. British American Tobacco is the only corporation to be in the top seven for both growth and highest dividend payouts.

Russ Mould, investment director at AJ Bell, commented: “With income being such an important consideration for many investors, particularly those in retirement, it can be tempting to simply seek out the stocks that are forecast to pay the highest dividend yield. However, it is important to also assess whether the dividend yield is sustainable by looking at dividend cover and whether the dividend is growing.”

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