10 high yielding blue-chips still growing the payout

by Ben Hobson from Stockopedia |

Income investors: how to balance the drive for high yield with greater certainty and avoid the traps.

Dividend payouts from UK quoted companies hit a new record last year. But behind the scenes, there were growing signs of uncertainty for the dividend outlook. For income hunters, the days of predictable payout growth, sizable special on-offs and the stimulating effects of a weak pound are all in question this year. So what should you do?

First, it’s worth understanding some of the moving parts in the stock market’s dividend engine. UK payouts topped £110.5 billion last year, which on the surface looks like another superb performance. Dividends have been growing at a clip over the past decade, so it's reassuring that records are still being broken.

Yet last year’s total was supported by an exceptionally large £12 billion of special one-off payments, according to analysis by Link Asset Services. That was triple the previous year. And, while it might not sound like a problem, the issue with ‘specials’ is that, by their nature, they are unpredictable. 

Take Vodafone (LSE:VOD) for example. In 2015 the telecoms giant paid what is still the biggest single dividend in corporate history. Selling its stake in Verizon triggered the return of an estimated £15 billion in cash and £36 billion of Verizon shares to its investors. Those were heady days, but last year Vodafone ended a 20-year growth streak with a 40% dividend cut. 

Fears now are that the special dividends paid out by mining industry giants like Rio Tinto (LSE:RIO) and BHP (LSE:BHP) in recent years may come to an end in 2020. It’s become less clear where the one-offs will come from. Like Vodafone did, a handful of stocks have propped up the dividend growth figures in recent years. But that may not continue.

Another big influence on the dividend growth stats last year was the soothing effects of a weak pound. With two-fifths of UK dividends paid in US dollars, exchange rates matter. 

Sterling was weaker in 2019 than it was in 2018. That inflated dividends in sterling terms to the tune of £2.4 billion in the first nine months of the year, according to Link. All in, currency effects accounted for three quarters of dividend growth (when you exclude specials). Again, there are no guarantees that will continue.

In terms of sectors, Oil & Gas - the home of BP and Royal Dutch Shell - is still the biggest dividend paying sector by a distance. But it saw no growth last year. Mining contributed the most to the growth figures, but that was mainly down to special payouts. Banking was also a major contributor to the growth. The weakest performance came from the Telecoms sector, with Vodafone’s dividend cut playing a big role.

Looking ahead, Link forecasts a solid 4.1% yield from the market in 2020. There’s an expected 4.2% pencilled in from the large-cap FTSE 100, and a lower 3% from the mid-cap 250.

For income investors, of course, the question is how to balance the drive for high yield with some sense of certainty. This week’s screen attempts to do that. It mixes the classic high yield ‘Dividend Dogs’ approach with an added rule that insists on forecast dividend growth in the financial year ahead. That growth element means that high yielders like Shell (LSE:RDSB), EVRAZ (LSE:EVR) and BT (LSE:BT.A) (where dividend cuts are forecast) miss out. Here is the list:

Name Forecast Dividend Per Share Forecast Yield % Forecast Dividend Cover Forecast Dividend Per Share Growth % Sector
Imperial Brands 2.14 11.4 1.2 3.1 Defensives
Taylor Wimpey 0.18 8.4 1.1 190.6 Cyclicals
Aviva 0.32 7.8 1.8 3.3 Financials
Persimmon 2.44 7.8 1.1 2.2 Cyclicals
BP 0.41 6.8 1.3 293.3 Energy
HSBC Holdings 0.51 6.7 1.3 0.2 Financials
Rio Tinto 3.51 6.5 1.6 49.9 Materials
Royal Bank of Scotland 0.14 6.4 1.7 321.3 Financials
British American Tobacco 2.22 6.4 1.5 7.7 Defensives
Lloyds Banking Group 0.04 6.2 2 4.8 Financials

All of these shares offer forward yields way ahead of the average 4.1%. At 11.4%, Imperial Brands leads the table, but is that yield too high and perhaps a pointer to some uncertainty in the market about its sustainability? Further investigation may be required there.

Elsewhere, the rules serve up a range of dividend stalwarts, ranging from the housebuilder Taylor Wimpey (LSE:TW.) and Persimmon (LSE:PSN) to the banks HSBC (LSE:HSBA), Royal Bank of Scotland (LSE:RBS) and Lloyds (LSE:LLOY)

For investors looking for buying opportunities as we head into the final weeks of the current tax year and into the next, there are certainly reasonable yields around. As always, high yield on its own can lead to trouble, but the inclusion of a positive dividend growth forecast could avoid the worst traps and help in the search for income for 2020.

These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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