The FTSE 100 is trading on a 4.9% yield, based on 2019 dividend forecasts, and total payouts are forecast to hit a new all-time high of £93.7bn next year, according to analysis by AJ Bell.
Some people turn to the stock markets to take advantage of better returns than cash or bonds. UK interest rates are currently low at 0.75% and the yield for UK 10-year government bonds is 1.23%.
Easy access cash accounts also offer disappointing returns with Goldman Sachs-owned Marcus currently offering the highest rate at 1.5%. If you happy to lock away your cash for a year, you could get 2.05% interest with Atom Bank.
Against this backdrop of meagre interest rates, high yielding stocks can offer greater appeal, particularly to investors seeking to beat inflation which is currently running at 2.4%.
However, high yielding shares come with much greater risks than cash savings. A high yield can even be a reflection of a weak share price, where the market doesn’t believe the earnings or dividend forecasts so investors are selling the stock which pushes down the price.
The dividend yield will rise upon a falling share price if dividend forecasts haven’t changed.
For example, many housebuilders currently have high yields because investors have been selling down their shares amid fears about house prices and future earnings.
Shore Capital analyst Robin Hardy disagrees with the bearish outlook for the housebuilding sector, claiming the share prices already have bad news baked in.
‘Looking into the early 2019, we believe the sector is likely to experience a bounce back from more realistic forecasting and a less nervous view of Brexit,’ comments Hardy.
Taylor Wimpey (TW.) offers the highest prospective dividend yield among FTSE 100 stocks at 13.1%.
Some analysts anticipate a dividend cut could be on the horizon for Centrica as it struggles with the new energy price cap, operational issues and customers flocking to competitors.
‘Of greater concern may be Standard Life Aberdeen (SLA), where a long streak of dividend increases is under threat according to consensus forecasts,’ comments AJ Bell investment manager Russ Mould.
Mould also flags Vodafone (VOD) as potentially risky as the dividend is not expected to grow for the first time in two decades.