The Bank of England may have held base rates at 0.5% today but a cut could come as soon as next month. Nobody is expecting rates to start rising until 2019 or 2020, and it could take even longer than that. Today’s world of perma-low interest rates only bolsters the case for investing in companies that pay a generous dividend. Plenty of stocks now yield over 7% or 8%, which means you can get an income stream of more than 16 times base rate. The big question is whether these dividends are sustainable.
Holding on
Domestic-focused UK banks may have collapsed of Brexit shock but global giant HSBC Holdings (LSE: HSBA) is 10% higher than a month ago, buoyed by generating more than 75% of its revenues outside Europe. The dividend is still a striking 8.20% although cover has fallen to just 1.3, down from 1.7 in 2013.
February saw speculation over whether the dividend was sustainable, after HSBC posted a surprise $858m pre-tax loss. The bank raised its dividend nonetheless, if at a slower pace than before, and has subsequently renewed its progressive vows. Investors will remain edgy, with earnings per share (EPS) forecast to drop another 15% in 2016 (EPS fell in 2014 and 2015 as well) but there’s hope further down the line, with a forecast 6% rise in 2017. Lower interest rates for longer and UK uncertainties will put further pressure on HSBC’s net margins but management won’t want to upset investors by cutting that dividend.
Legal wrangles
Insurance giant Legal & General Group (LSE: LGEN) hasn’t had such a good Brexit: its share price is 15% lower than a month ago. Fears of diminished domestic and global growth prospects have hit the insurance sector hard, and L&G has missed out on the post-Brexit bounce. Yet it continues to generate new growth opportunities, notably from bulk annuity sales and lifetime mortgages, and has survived the pension freedom assault on annuities in good shape.
L&G reports little Brexit disruption so far but that may change when new Prime Minister Theresa May triggers Article 50. Today’s 7.2% yield is attractive and is covered 1.4 times. The company has posted double-digit EPS growth for the last four years, with forecast growth only slightly lower at 9% this year and 6% in 2017. The cash is flowing and the dividend looks secure for now.
Safe as houses
The housebuilding sector has been hit hardest by Brexit as investors in Persimmon (LSE: PSN) know all too well: its share price is 20% lower than one month ago. Yet unlike L&G it has rallied (up 20% in a week) as nerves calm and investors focus on the fundamentals instead, such as the company’s strong balance sheet and lack of debt.
The Royal Institute of Chartered Surveyors has just published figures showing a “marked drop in activity in the housing market” since the referendum. But I suspect this will stabilise as mortgage rates fall to new lows and supply/demand imbalances continue their work. Persimmon’s 7.1% yield is covered 1.4 times and the glory years of 40% or 50% annual EPS growth are over, with a forecast 6% drop in 2017. However, with cash reserves topping £500m the dividend should survive all but the sharpest downturn.
