For many income-hungry investors, it can be all too tempting to simply seek out the highest yielding shares. However, a stock which currently offers a high dividend yield is not necessarily a good investment unless its payout can be sustained for years to come.
Longer-term fundamentals
One stock which I believe offers a sustainable high yield is Standard Life Aberdeen (LSE: SLA). Although the recently-merged asset manager is facing a number of challenges, most notably the loss of an asset management deal with its biggest client Lloyds Banking Group, the company’s longer-term fundamentals remain attractive.
In an industry which has been under pressure from the implementation of the European Union’s MiFID-II directive that caused many asset managers to absorb new research costs, Standard Life Aberdeen is moving with haste to deliver the cost synergies promised by its recent merger. Early indications show the integration is on track, and in a recent statement to shareholders, the company said that it now expects to deliver £250m in annualised cost savings, up from its previous estimate of £200m.
Fund outflows
Certainly, not everything is going to plan. With hindsight, it’s clear that investors have underestimated the disruption caused by the merger, especially the heavy fund redemptions from institutional investors in recent months. But I reckon the company is enduring some short-term pain to avoid long-term woes.
The asset management industry is undergoing some big changes as it faces stiff competition from passive managers and the company is trying to get ahead of the curve before it’s too late. The merger brings much needed scale and financial clout as it sets out to meet the future investment needs of its clients — via the launch of new ‘next generation’ investment solutions and the pass-through of lower costs to its clients.
However, not everyone is convinced as valuations are undemanding, with the shares trading at 12.6 times forecast earnings this year. This means that on top of its attractive 5.8% yield, there’s also serious upside potential from a re-rating of its shares.
Reliable dividends
United Utilities (LSE: UU), which manages the regulated water and waste water network in North West England, is another FTSE 100 stock which seems set to deliver reliable dividends.
In a recent trading update ahead of its full-year results on 24 May, the company announced it was trading in line with earlier expectations and that it was on course to report growth in both revenue and underlying operating profit. This marks another strong year with the company maintaining its upbeat guidance on its performance against the regulator Ofwat’s Outcome Delivery Incentives.
I know there’s a lot of uncertainty surrounding future regulation, with Ofwat signalling a much tougher price control regime for the upcoming regulatory review, but I reckon shares in United Utilities have already priced-in much of the risk. Although the tougher pricing regime will probably hurt returns going forward, I reckon any changes will likely be modest and incremental in order to protect investment in the sector.
Unitied Utilities has a strong track record of steadily growing its dividends, having raised its dividend payout from 30p in 2010 to 38.87p, representing a compound annual growth rate (CAGR) of 3.8%. The shares currently yield 5.3%, with dividend growth forecast to grow by at least the rate of RPI inflation annually through to 2020.
