The FTSE 100 may be continuing to underperform international indices, but the index nevertheless has risen by 2.3% year to date (excluding dividends) and nearly broke the symbolic 8,000-point barrier yesterday before correcting downwards.

FTSE 100 macroeconomics

In the recent budget, Chancellor Jeremy Hunt introduced the ‘British ISA,’ which when rolled out will allow UK-based investors an additional £5,000 allowance on top of the current £20,000, which can only be invested specifically in ‘UK companies.’

The government is trying to spur internal investment, in an attempt to stem UK delistings, the IPO drought, and continued private equity bids for ‘undervalued’ businesses listed in London.

On the macroeconomic front, the base rate remains at 5.25%, while CPI inflation stands at 3.4% and is expected to fall below 2% within the next few months. However, strong wage data and relatively low unemployment means inflation could start to rise again later on.

On the other hand, Bank of England Governor Andrew Bailey has advised that rate cuts are ‘on the way.’ But after Brexit, the pandemic, the inflation crisis, Russia’s invasion of Ukraine, Silicon Valley Bank and Credit Suisse, alongside several other black swans, investors may not be taking rate cuts for granted.

Then there’s the AI-fuelled surge of the US tech stocks to consider. This may be a sustainable rise given the tech advances at hand or may be a bubble that eventually bursts. If the latter, this excess capital may find itself within FTSE 100 dividend stocks until the storm blows over.

This all makes investing in FTSE 100 dividend stocks complex. In particular, the highest dividend yields can be hostage to economic policy — where individual investment cases and changing financial landscapes can create value traps or payout irregularities.

FTSE 100 dividend shares to watch

These shares are the highest yielding on the index as of 4 April 2024. They may not be the best investments and the dividends and capital itself are not guaranteed.

1. Vodafone
2. British American Tobacco
3. Phoenix Group
4. M & G
5. Imperial Brands

Vodafone

Vodafone's recent Q3 results saw total organic revenue grew by 4.7%, a significant improvement on the 1.8% growth of a year ago. Meanwhile, global services revenue rose by 8.8% while the B2B division grew by 5% year-over-year.

The company remains one of the largest telecoms companies in Europe, and the current strategy may be delivering. For context, 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 debt mountain, which remains multiples of Vodafone’s market capitalisation. However, the FTSE 100 operator has agreed an €8 billion sale of Vodafone Italy to bolster cash reserves and also return €4 billion to investors via share buybacks.

CEO Margherita Della Valle enthuses that ‘Going forward, our businesses will be operating in growing telco markets - where we hold strong positions - enabling us to deliver predictable, stronger growth in Europe. This will be coupled with our acceleration in B2B, as we continue to take share in an expanding digital services market.’

Vodafone remains confident in previous guidance for future underlying earnings — and with a price to equity ratio of just 2 (despite this figure being affected by asset sales), it may be attractive to value investors.

Dividend Yield: 10.96%

British American Tobacco

British American Tobacco full-year results saw the FTSE 100 dividend company’s revenue fall by 1.3% at constant currency rates, though rise by 3.1% on an organic basis at constant rates. This was driven by ‘new categories’ growth with revenue from non-combustibles now worth 16.5% of group revenue.

CEO Tadeu Marroco enthuses that ‘2023 was another year of resilient financial performance and delivery in line with our guidance, underpinned by our global footprint and multi-category strategy, despite a challenging macro-environment. New Categories delivered continued volume-led revenue growth and increased profitability.’

However, the FTSE 100 tobacco company will have to pivot fast, having written off £27.3 billion of its US brand portfolio 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 — and is also imposing a specific vaping tax as well. This could hit margins if similar legislation is adopted more broadly.

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. And in addition to the elevated dividend, BATS is continuing with its share buyback programme, most recently buying 280,000 shares on 28 March that it plans to cancel.

Dividend Yield: 9.80%

Phoenix Group

Phoenix Group saw another excellent set of results in March, with total cash generation of more than £2 billion — in excess of its upgraded target of £1.8 billion for 2023. This included a significant benefit of circa £400 million from the previously announced part VII transfer of Standard Life and Phoenix Life.

And PHNX also generated just over £1.5 billion in incremental new business long-term cash generation, beating its self-imposed target two years early.

Despite the healthy dividend, the FTSE 100 insurer also maintains a strong balance sheet — a Solvency II surplus of £3.9 billion and a SII shareholder capital coverage ratio of 176%, towards the top end of its operating range of 140% to 180%.

The company now plans to reduce its debt pile by at least £500 million by the end of 2026 and recommended a 2.5% increase in its final 2023 dividend, bringing the total payout for the year to 52.65p. Phoenix also intends to grow its operating cash generation from £1.1 billion in 2023 to £1.4 billion in 2026.

CEO Andy Briggs notes that ‘Phoenix's vision is to be the UK's leading retirement savings and income business, and we are making great progress in delivering our strategy to achieve this, as our strong 2023 financial results demonstrate.’

Dividend Yield: 9.59%

M&G

M&G's recent full-year results saw adjusted operating profit before tax rise by 28% year-over-year to £797 million, reflecting ‘a resilient performance in Asset Management, and improved contribution from Life, Wealth and Corporate Centre.’

Accordingly, operating capital generation rose by 21% to £996 million, driven by strong underlying capital generation of £752 million. Over the course of 2022 and 2023, M&G generated £1.8 billion in operating capital — leaving the FTSE 100 company on course to achieve its three-year cumulative operating capital generation target of £2.5 billion by end of 2024.

The Shareholder Solvency II coverage ratio now stands at an impressive 203%, while the company announced a 2023 total ordinary dividend of 19.7p per share.

CEO Andrea Rossi enthuses that ‘This financial performance underscores the importance of our balanced and diversified business model, with strong growth achieved despite continued macroeconomic uncertainty… I am confident about the prospects for M&G as we remain focused on executing our strategic plan.’

Dividend Yield: 9.24%

Imperial Brands

Imperial Brands is the second FTSE 100 tobacco stock — and faces many of the same issues as BATS: regulatory clampdowns and changing consumer habits.

However in recent results, the company saw adjusted operating profit grow in line with its five year plan, including 10 basis points aggregate market share growth in its top-five priority combustible tobacco markets.

Further, next generation product net revenue rose by 26% — and increased by a whopping 40% in Europe. Accordingly, the dividend was hiked by 4% alongside a 10% increase in share buybacks, leaving investors with total FY24 returns of £2.4 billion.

CEO Stefan Bomhard enthuses that ‘means we are well placed to deliver on our commitment to enhance returns to investors, with increases to both our dividend and buyback programme. Looking ahead, we expect the continuing benefits of our transformation to enable a further acceleration in our adjusted operating profit growth in the final two years of our five-year strategy.’

Like BATS, Imperial is continuing to buy back shares, and recently kicked off the second half of its previously announced £1.1 billion program.

Dividend Yield: 8.34%