Top 40 High-Yield Blue-Chip UK Stocks: Spring 2023

After a slight delay caused by a very busy results season, here at last is the second edition of my Top 40 list of UK dividend stocks.

You can see the full list at the bottom of this post, but first, let's get the big caveat out of the way:

This is a mechanical list that ranks FTSE 350 stocks by a combination of their market capitalisation (bigger is better) and forecast dividend yield (higher is better). It says nothing about my like or dislike of any particular stock, or whether you should or shouldn't invest in them. It is simply an easy way to answer the question, "which dividend stock should I look at next?"

Much has changed since the last update in September, with banks now hogging many of the top spots.

High yield banks and another banking crisis

Bank shares have gone down in the last couple of weeks and their dividend yields have gone up, because (as I’m sure you already know) several banks have recently failed:

• Why Silicon Valley Bank and Signature Bank failed so fast (PBS)
• Credit Suisse's Demise: A Timeline of Scandal and failures (Morningstar)
• Is this a banking crisis - how worried should I be? (BBC)

Banks now make up four of the top 12 dividend stocks and life insurers another three, so financial stocks make up more than half of the top dozen UK dividend stocks.

To some extent this isn’t a surprise, because UK financial stocks have been out of favour for years, but the level of negativity towards these companies is now extreme.

Number one on my top 40 list is HSBC, with a market cap of £111 billion and a massive forecast yield of 8.7% (according to SharePad).

NatWest is number nine, with a forecast yield of 6.6% and Barclays is number ten with a 6.4% forecast yield. Lloyds rounds out the top dozen dividend stocks with a forecast yield of 6%.

Those are all very attractive yields and although I haven’t looked at those companies in detail, if you’re comfortable investing in banks then they could well be worth a look.

As I’ve already mentioned, life insurers are also very much out of favour. Whether that’s the LDI crisis or something else, I don’t know, but their yields are very enticing.

Legal & General is the highest-ranking life insurer with a somewhat unbelievable 9% forecast dividend yield. L&G has been in the UK Dividend Stocks Portfolio since 2017 so I know the company quite well, and my opinion is that L&G’s dividend should be sustainable (although of course, dividends are never guaranteed).

The other two life insurers are Aviva and Phoenix, with respective forecast yields of 8.2% and 9.4%. Those yields are so high that the market must be expecting dividend cuts at the very least, but if those cuts don’t materialise, these stocks could be very attractively priced.

Everyone hates tobacco stocks, for obvious reasons

Tobacco stocks operate in a structurally declining market and they have long been socially stigmatised, so the fact that they are out of favour in a world that is increasingly interested in “socially useful” investments is no surprise.

That’s why both of the UK’s big tobacco stocks, British American Tobacco and Imperial Brands, are comfortably within the top ten dividend stocks.

British American Tobacco has a forecast yield of 8.3%, which is good because it’s one of the larger holdings in my portfolio.

In terms of ethics, my opinion is that as long as people know the risks then they should be allowed to smoke, ride a motorbike or go bungee jumping, so if smoking is legal then I have no moral qualms about investing in tobacco stocks. 

If anything, I am more concerned about the government’s increasing use of nudge economics, where the government manipulates the behaviour of citizens in ways the government thinks will improve our lives.

This implies that people are incapable of making their own decisions about smoking, drinking sugary drinks and living their lives in general, and that we need a wise and benevolent government to help us make these decisions. This infantilises society (the language used to describe these nudges ranges from "smacks" to "hugs") and is not a good path to go down, but I’ll leave that rant for another day.

Source: Changing Behaviours - To Nudge or to Shove? (PDF)

As for tobacco stocks, British American Tobacco has done an amazing job of scaling up its post-cigarette brands Vuse and Glo, and they are on schedule to break even in 2024. And with momentum building in its post-nicotine ventures, including vaccine production and cannabis-derived products, the future could be bright for this company (although I expect a change of name at some point).

The UK is one of the most attractive dividend-focused stock markets on the planet

The FTSE All-Share has been out of favour with investors for more than a decade, thanks to the financial crisis, the Eurozone crisis, Brexit, Covid and the long-running UK housing bubble, where houses have become an important pension investment rather than stocks.

This has left the FTSE All-Share with embarrassingly terrible capital gains over the last 20 years, but the good news is that for dividend investors, this is a golden age.

If you bought every one of the 40 stocks on this list and weighted them evenly, the resulting portfolio’s forecast yield would be astonishingly high at 6.8%. Of course, there’s more to dividend investing than simply looking at dividend yields, but to have such a high average yield across a collection of mostly multi-billion-pound companies is very unusual.

To some extent we have the current economic malaise and now a banking crisis to thank for this, as the FTSE All-Share fell 7% last week as banks were going bust left, right and centre. But it is at times like these that investors must remember these immortal words:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons” - Warren Buffett

You can find the complete top 40 list of UK dividend stocks below. If you want to see the very latest version (in case you’re reading this in the future) please go to the Free Resources page.

I'll publish the next top 40 review at some point during the summer.