With interest rates set to remain low over the coming years, dividend stocks are likely to remain popular among investors. As such, buying higher yielding stocks now could not only lead to improved income returns, but also to capital gains as their share prices are gradually bid-up by yield hungry investors.
One stock that’s consistently strong when it comes to dividends is BAE (LSE: BA). The defence company currently yields 4.5% and while dividends per share have risen by 2.7% per annum in the last five years, their rate of growth in future years is likely to be much higher. That’s because the outlook for the global defence industry is much more positive than it has been in recent years, with the improving US economy likely to cause a rise in global defence spending.
Clearly, this would be good news for BAE and could help to boost its shareholder payouts. Evidence of this can be seen in next year’s forecast earnings growth, with BAE expected to record a rise in its bottom line of 7%. When this improved growth outlook is combined with a payout ratio of just 56%, BAE’s dividend growth potential seems high. And with it trading on a price-to-earnings (P/E) ratio of 12.5, BAE seems to offer good value for money, too.
Is the worst over?
Also offering a high yield is Petrofac (LSE: PFC), with the oil and gas support services company currently yielding 5.5%. While the outlook for the oil and gas industry is highly challenging and uncertain, Petrofac’s financial performance is expected to improve next year. In fact, its bottom line is forecast to rise by 6% and this shows that the worst of the oil price crisis could now be over.
With Petrofac’s dividend being covered more than twice by net profit, it seems to be in a strong position to raise shareholder payouts over the medium term. Certainly, the pace of increase may not be as fast as some of its index peers owing to the likely cautiousness of Petrofac’s cash management, but dividends could still easily beat inflation over the coming years. Furthermore, with Petrofac trading on a forward P/E ratio of just 9.5, it seems to offer tremendous upside potential as well as a wide margin of safety.
Sweet spot
Meanwhile, Tate & Lyle (LSE: TATE) is another super income stock, with the specialist food company currently yielding 4.8%. That’s 20% higher than the FTSE 100 and with the company forecast to increase its bottom line by 10% this year and by a further 5% next year, there’s real potential for inflation-beating rises in shareholder payouts. Plus, with Tate & Lyle currently paying out 77% of profit as a dividend, there may be scope for a higher payout ratio over the medium term.
Certainly, Tate & Lyle isn’t the most defensive of stocks and its financial performance is dependent on commodity prices. As such, it may not be the most reliable of dividend payers, but with its shares now trading on a P/E ratio of 16.1, it seems to offer good value for money and could prove to be a strong dividend play in the long run.
