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When mortgage charges are falling and financial savings accounts yield 3%, if fortunate, the enchantment of dividend shares is unimaginable to disregard. The FTSE 100‘s common 3.4% yield seems to be engaging on paper, and a few names — resembling Authorized & Common at 8.1% — appear to supply mouth-watering returns.
But this revenue temptation masks 5 important risks that would depart portfolios in danger if traders aren’t cautious.
Harmful focus
The Footsie’s dividend revenue is alarmingly concentrated. The highest 5 dividend payers account for 28.7% of whole dividend funds, whereas the broader prime 15 firms symbolize nearly 60% of the index’s revenue.
This creates a structural vulnerability: the FTSE fell 30% throughout Covid however dividend funds fell solely 10%. But when these concentrated payers face earnings strain concurrently, the cuts may very well be much more extreme.
The life insurance coverage time bomb
Life insurers dominate the high-yield house, with Authorized & Common and Phoenix Group providing 8.1% and seven.9% respectively. This focus in a single sector amplifies danger. With rates of interest now anticipated to succeed in 3% by year-end, margins will likely be squeezed on the billions these corporations handle.
The paradox: falling charges that make dividends extra engaging are concurrently eroding the earnings that assist them.
Housebuilder cyclicality
Taylor Wimpey yields 9.2%, however the yield hides underlying points. The sector additionally faces margin strain from build-cost inflation, unsure demand restoration and regulatory danger round provide reforms and tax coverage. If completions gradual or prices spike, dividends grow to be susceptible — no matter present coverage modifications.
Dividend cowl deteriorating
Many high-yielders at present wrestle with dividend cowl. Land Securities (LSE:LAND) illustrates the problem acutely. The corporate’s payout ratio stands at 167%, which means it’s distributing considerably additional cash to shareholders than it generates in present earnings. Nonetheless, critically, it additionally demonstrates why this example could also be non permanent somewhat than terminal.
A case examine in dividend restoration
With a £9.3bn valuation, Landsec owns and manages premium business and residential property within the UK. Buying and selling at round 650p, it provides a dividend yield of 6.5%. The corporate’s grow to be more and more engaging to revenue traders searching for publicity to London’s property market restoration — and up to date administration updates counsel the restoration narrative has real basis.
Nonetheless, it faces notable challenges. With a payout ratio of 167%, the corporate’s returning greater than present earnings to shareholders. That is solely sustainable if earnings progress accelerates meaningfully. And with £4.65bn in whole debt towards solely £424m in EBITDA, there’s a danger it might have to chop dividends if earnings don’t enhance.
Encouragingly, the newest half-year outcomes counsel administration’s executing a reputable turnaround. The corporate offered £644m of low-returning property, with an additional £1bn deliberate over the following three years, redirecting capital into higher-yielding property. And it seems to be prefer it’s already working, with like-for-like rental revenue rising 5.2% in H1 2025, with workplace occupancy reaching 98.8% and retail occupancy at 96.7%.
Additionally, purchasing centre buying and selling within the remaining Golden Quarter revealed market-beating gross sales.
The underside line
Excessive dividend yields aren’t free cash — they’re compensating traders for danger. Earlier than shopping for dividend shares, at all times verify dividend cowl, debt, sector vulnerability and operational proficiency.
Landsec provides potential for a significant turnaround, nevertheless it requires endurance and conviction that administration can ship on its technique. As at all times, there’s reasonable danger.
Nonetheless, I believe it’s one of many extra promising dividend shares to think about this 12 months.
