In the quest to supercharge income flows from your investment portfolio, it’s easy to be seduced by the pull of big near-term yields at the expense of everything else.
Those neglecting key issues like dividend coverage, and the possibility of earnings growth hitting the rocks, are more than likely to come unstuck. Such a strategy may work for those picking up and selling stocks on a short-term basis, but it’s a recipe for disaster for those taking a more conventional and sustainable approach to investing: that is through buying and holding stocks for an average period of between five and 10 years.
Spectacular yields
The FTSE 100 is jam packed with shares to trap investors with their big yields, from embattled energy suppliers SSE and Centrica and downtrodden supermarket giant Sainsbury’s, to cigarette manufacturers Imperial Brands and British American Tobacco. But equally there are plenty of big yielders in great shape to deliver solid profits growth and thus chunky, inflation-beating dividend yields long into the future.
Vodafone Group (LSE: VOD) is one of these. In fact, it’s a share I would happily buy today and never part from.
Many analysts had been predicting a painful dividend cut when the telecoms play came to reporting interim results earlier this month. It’s not a scenario that I predicted would play out and so it came to pass. Vodafone kept the interim dividend stable at 4.84 euro cents per share and went one step further by predicting that the full-year reward would remain unchanged at 15.07 cents.
While the near-term dividend doesn’t look likely to be covered by earnings in the current period, the Footsie firm’s smashing cash generation (free cash flow rose 36% to $566m in the six months to September) gives assurance that Vodafone has the strength to meet such a payment. And so a forward yield of 8% is built on pretty safe ground.
The blue-chip is expected to record a 15% earnings fall in the year to March 2019, but it’s expected to fight back with a 16% rise the following year. With demand from developing markets surging (Emerging Consumer organic revenues rose 7.4% in the first half to illustrate this), and Vodafone likely to embark on further M&A action as well, I am backing the profits recovery to stretch long into the future.
Another dividend hero
I’d like to draw your attention to Ferguson (LSE: FERG) while you’re here, another dividend hero I’d buy and cling to for years to come.
I’ve lauded the plumbing and heating giant’s ultra-progressive dividend policy before and last month’s excellent trading update has reinforced City predictions that the payout for the fiscal year to July 2019 will jump again and breach the 200 US cens per share barrier. This results in a chubby 3.1% yield, some way short of Vodafone’s, but still smashing inflation in the UK.
And thanks to the robustness of its end markets — homebuilding in the US rose a further 1.5% in October for example, according to the Commerce Department — I am confident that Ferguson, which is predicted to report a 15% earnings improvement this year, can keep reporting brilliant profits and therefore dividend growth long into the future. It’s a share whose best days are in front of it, in my opinion.
