UK investors tend to turn to the FTSE 100 for the relative safety provided by the dividend stocks — while the index typically pays out circa 4% per annum, there are many popular choices which have been sustainably paying out more than this over many years.

While past performance is not an indicator of future returns, but the common trope is that investors in FTSE 100 dividend shares are eschewing the increased capital gains on offer elsewhere — for example, the S&P 500 — in return for reduced risk.
However, several FTSE 100 companies have delivered extraordinary returns in 2023, and while there is an element of subjectivity to ‘top stocks’ to watch in 2024, the following five could be on investor radars.

Top stocks to watch

Rolls-Royce (LON: RR)

Up 205% year-to-date to over 300p, CEO Tufan Erginbilgic has seen Rolls-Royce become the star performer of the FTSE 100, with the executive delivering a magnificent turnaround during his first year at the helm.

For balance, he came on board at a fortuitous time; soaring post-pandemic travel demand has increased flying hours and therefore demand for civil aviation work. Meanwhile, the Russia-Ukraine war has seen defence spending rise sharply. And the rising political importance of energy independence is also a helpful tailwind, given the investment into small modular nuclear reactors.

But the growth could be set to continue. With a slew of banking giants, including Citi, UBS and Deutsche Bank upgrading their targets in recent days, Fitch Ratings has upgraded Rolls to BB+. This represents a significant step towards regaining its all-important BBB investment grade status, lost during the pandemic.

For context, the FTSE 100 stalwart plans to deliver operating profit of as much as £2.8 billion and free cash flow of up to £3.1 billion by 2027.

Share price growth over the past year: 205%

Marks & Spencer (LON: MKS)

Other than being London-listed, possibly the only factor that connects Rolls-Royce and Marks & Spencer is that a new CEO has come in and delivered a solid turnaround strategy. Stuart Machin’s strategy is clearly delivering results, with the retailer returning to the FTSE 100 earlier this year.

In H1 2023 results, revenue increased by 11% year-over-year to £6.13 billion, while net income rose by 25% to £208 million. Meanwhile, the profit margin — usually razor-thin in retail — improved from 3% to 3.4%.

Much of this growth can be attributed to its strategic pivot. Underperforming shops were closed down, while those with untapped potential were refreshed — and the retailer invested huge sums into its web presence and online platform, targeting younger consumers.

Christmas is generally a good time to be in retail, and further growth next year may be incoming.

Share price growth over the past year: 115%

3i Group (LON: III)

3i Group is a popular FTSE 100 investment due to its status as a private equity and venture capital specialist. While Scottish Mortgage Investment Trust also offers some exposure toe privately held companies, 3i is one of the few simple ways for the average retail investor to gain access to this segment of the market.

In H1 2023 results, and even despite the difficult macroeconomic environment, the company achieved a £1.67 billion total return, representing a 10% return on opening shareholders’ funds. For context, this compares to a 14% return worth £1.77 billion in the same half in the previous year — but the drop appears encouraging given the current environment.

A highlight was portfolio company Action, a discount retailer focused on the Benelux region (Belgium, Netherlands, Luxembourg), which is now the fastest growing non-food discount retailer in Europe.

Share price growth over the past year: 76%

Centrica (LON: CNA)

While Centrica has fallen from its peak in September — partially due to analyst commentary — the company has made significant strides in 2023 that could see it in good stead in 2024.

The electricity and gas supplier’s interim results saw adjusted operating profit rise to £2.1 billion compared to £1.3 billion in 2022, generating a £6.5 billion statutory operating profit compared to the £1.1 billion loss of a year prior. Its closing adjusted net cash was a strong £3.1 billion, allowing the company to up the dividend by 33% to 1.33p per share extended the share buyback programme to £450 million.

Centrica is delivering its green-focused investment strategy with annualised investment building to between £600m and £800m until 2028, with an aim to deliver average portfolio post-tax unlevered returns of between 7% and 10%+. And it expects to maintain Return on Average Capital Employed (ROCE) of at least 20% through this investment horizon.

Share price growth over the past year: 62%

AB Foods (LON: ABF)

AB Foods — owner of a variety of food brands alongside Primark — saw full-year pre-tax profit for its last financial year rise by 25% to £1.34 billion, driven by a 16% increase in revenue to £17 billion, £9 billion of which was derived from Primark.

Accordingly, the FTSE 100 company delivered a full-year dividend of 60p per share, up from 43.7p — and still delivered one of the best capital returns on the index this year.

It’s worth noting that AB Foods was facing, in the words of CEO George Weston — ‘very significant economic challenges caused in part by major geopolitical events. Looking back on the year, it is clear to me that the group performed extremely well and is as a result now well positioned for the year ahead.’

The company may be an attractive proposition in 2024 given Primark’s market position amid a cost-of-living crisis, alongside its diversification into multiple retail sectors.

Share price growth over the past year: 50%

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*Based on revenue excluding FX (published financial statements, October 2021).