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The FTSE 100‘s been a great place to search for dividend shares in recent decades. But times have been tougher more recently as earnings and balance sheets have become strained.
Broker AJ Bell notes that “there have been 138 dividend cuts across the current crop of FTSE 100 members in the past decade”. More than half (74) came out of the blue when the Covid-19 crisis broke. Another nine were chalked up in 2023.
The checklist
Overall, UK blue-chips tend to be a good bet for investors seeking dividend income. The Footsie’s average dividend yield sits at an inflation-busting 3.8% for this year, AJ Bell says. And the figure rises to 4.1% for 2025.
But a patchy record since the pandemic means investors need to be more careful that usual when investing for dividends.
I look for companies that have:
- Market-leading positions and diverse revenue streams
- Defensive operations that provide earnings stability
- A sustainable dividend payout ratio of 30-50%
- Strong dividend cover of 2 times or above
- Robust balance sheets (with solid cash flows and low debt)
- Long track records of dividend growth
Not all top dividend stocks meet all of these criteria. But by trying to tick off as many as possible, I can significantly boost my chances of generating a healthy passive income.
Top stock number 1
To this end, HSBC Holdings (LSE:HSBA) is on my list of dividend stocks to buy in May. That’s even though its recent dividend record is less than perfect. The banking giant cut the dividend in 2019 and again in 2024.
It’s also despite profits creation being highly dependent on strong economic conditions. Particularly concerning for this stock is continued turbulence in the key Chinese economy.
HSBC has a lot of attractive qualities as a dividend stock. Its dividend yield for 2024 sits at 7.6%, which is double the FTSE 100 average.
This year’s predicted dividend is also covered 2.3 times over by expected earnings. The company also has a strong balance sheet, a CET1 capital ratio of 14.8% as of December has been boosted more recently by asset sales in Canada.
Finally, HSBC’s dividend payout ratio stands at a sustainable 43%.
Top stock number 2
I’m also considering buying WPP (LSE:WPP) shares this month. The advertising giant carries an excellent 4.8% dividend yield for this year.
Shareholder payouts here are highly correlated to the strength of the global economy. So WPP’s annual dividend is expected to be frozen at 39.4p per share for the second straight year in 2024 as tough conditions persist.
But as an income investor there’s still a lot to like here. The ad agency still carries that market-beating yield, of course.
Meanwhile, dividend cover sits at 2.3 times. Net debt to EBITDA stands at a manageable 1.8 times. And the payout ratio comes in at around 40%. All of these give current dividend forecasts added strength.
I’m confident WPP will be in a position to grow dividends again before long too. I believe its growing investment in digital advertising and ongoing global expansion should drive profits (and thus dividends) steadily higher.
