Down 1.4% year-to-date, the FTSE 100 has once again started the year by underperforming the S&P 500 and Nasdaq Composite. Of course, the index is famously viewed as a more conservative investment — filled with mature banks, oilers and miners which pay out dividends rather than focus on capital growth.

For context, the FTSE 100 rose slightly in 2022 as interest rates rose sharply, while the Nasdaq fell into a bear market. Over the longer term, the US stocks have historically outperformed the UK (though past performance is not an indicator of future returns), but the best FTSE 100 dividend stocks are often included in portfolios for the relatively reliable income.

Of course, many FTSE 100 companies deliver high dividend returns — though many are cyclical and the highest returns on offer may not be sustainable. It’s worth noting that popular dividend companies tend to attract significant investment in times of macroeconomic stress, which can become a problem as the economy improves and investors sell shares to seek more lucrative opportunities elsewhere.

On the monetary policy front, the Bank of England has once again kept the base rate at 5.25% — a rate it has kept since September 2023 — though now expects CPI inflation to fall to 2% by May. While it has signalled that rate cuts may be incoming, the Bank has also warned that it would need to see evidence that inflation was sticking to the target level first.

For context, the Bank still expects that inflation will rise back above the target range later this year due to robust pay growth and the fading impact from lower energy prices. Governor Andrew Bailey has specifically noted that ‘we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.’

On the fiscal policy front, the government will issue the spring budget on 6 March. While Chancellor Jeremy Hunt has tried to make clear the scope for tax cuts is limited — especially after the recent IMF intervention — the political reality is that this may be the last major fiscal policy in place before the General Election.

Top FTSE 100 dividend shares to watch

These shares are the highest yielding on the index as of 5 February 2024. They may not be the best investments and the dividends and capital itself are not guaranteed.

1. Vodafone
2. Phoenix Group
3. British American Tobacco
4. M&G
5. St James's Place

Vodafone

Today’s Vodafone quarterly update received a mixed reaction from the markets —total organic revenue grew by 4.7%, a significant improvement on the 1.8% growth of a year ago. The company remains one of the largest telecoms companies in Europe, and the current strategy may be delivering. Global services revenue is up by 8.8% while the B2B division grew by 5% year-over-year.

Further, the all-important German sales rose by 0.3% in the quarter. However, the company is actually losing customers in the region, with the revenue growth driven by price increases.

The key risk could remain the circa £55 billion debt mountain, which remains multiples of Vodafone’s market capitalisation. However, the company remains confident in previous guidance for future underlying earnings — and with a price to equity ratio of just 2, it may be attractive to value investors.

Dividend Yield: 11.2%

Phoenix Group

Phoenix Group's recent trading update saw the company deliver £1.5 billion of new business long-term cash generation in 2023, achieving its 2025 target much earlier than expected.

CEO Andy Briggs remains ‘delighted that Phoenix Group has delivered another year of strong organic growth in 2023, with increased new business net fund flows supporting us… we have achieved our 2025 new business long-term cash target two years early, reflecting the focus and investment we have put into our growth strategy.’

For context, new business net fund inflows rose by circa 80% year-on-year to £7 billion, driven by improved performances at the Standard Life branded Pension & Savings and Retirement Solutions segments.

Within pensions and savings, Phoenix’s workplace business saw net fund flows nearly double year-over-year to circa £4.5 billion. According to Briggs, this included ‘the transfer of one of the largest workplace schemes tendered in the UK market in recent years.’

Dividend Yield: 10.3%

British American Tobacco

British American Tobacco is due to report full-year results this week — but despite the high dividend, the company is once again bracing for poor numbers. Analysts consider that the company will deliver revenue growth of between just 3% and 5% due to difficulties in the US market. For context, the FTSE 100 tobacco company wrote off £25 billion of its US brand portfolio recently after acknowledging they have ‘no long-term future.’

Compounding the weak combustibles growth, the UK recently announced a ban on disposable vapes which could hit BATS’ long-term ambitions in non-combustible categories — though may also drive out cheaper brands, especially if similar bans are introduced elsewhere.

Positively, the titan and competitor Philip Morris International have finally agreed an eight-year long resolution to long running patent disputes on their cigarette alternatives technology.

Dividend Yield: 9.8%

M&G

M&G plans to generate operating capital amounting to £2.5 billion by the end of 2024 and had achieved more than 50% of this three-year target, 18 months in. Moreover, its shareholder Solvency II Coverage ratio remains at the top end of the target range at 199%, with no defaults in the first half of the year.

In half-year results, M&G increased its interim dividend by 5% to 6.5p per share. For context, it saw positive net client inflows of £700 million — remaining positive into a third consecutive year. M&G also saw operating capital generation rise by 17% year-over-year to £505 million, driving adjusted operating profit 31% higher to £390 million.

CEO Andrea Rossi enthused that the results ‘demonstrate the underlying strength of our business model, the resilience of our balance sheet… we have made progress against all three pillars of the strategy that we launched in March.’

Full-year results will be released in March.

Dividend Yield: 9%

St James’s Place

Shares in St James's Place have nearly halved over the past year, with the wealth manager now reporting that it saw only £5.1 billion in net inflows in the 2023 calendar year — compared to £9.8 billion in 2022.

However, it remains the largest wealth manager in the UK, with more than 900,000 clients and total funds under management now standing at a record £168.2 billion, up from £148.4 billion at the end of 2022.

New CEO Mark FitzPatrick plans to launch an efficiency review into the business within the next few months — partially driven by its October announcement to radically overhaul its fee structure in response to pressure from the Financial Conduct Authority, including scrapping exit fees to clients withdrawing from pension and bond investments early.

Dividend Yield: 8.2%