A key theme of investing over the last few years has been income plays. In other words, companies that pay a generous dividend, and whose shares yield an above-average amount, have proven to be very popular with a relatively large number of investors.
The reason for this seems clear: low interest rates mean that inflation is a constant concern and bank savings accounts are so low that cash provides next to no return.
However, one theme that has perhaps not been explored to its full potential within income investing is companies that should be paying higher dividends. Were such companies to increase dividends per share, it could mean higher share prices and a closer retirement date for investors.
For instance, BAE Systems (LSE: BA) (NASDAQOTH: BAESY) currently yields a rather impressive 4.7%. This is considerably higher than the FTSE 100 yield of 3.5% and so puts BAE into the ‘income bracket’ of shares that may be of interest to income-seeking investors.
However, BAE only pays out around 48% of net profits as a dividend, with the remainder being used to reinvest in the business to try and secure future growth. However, as a very mature and stable business, it could reasonably be argued that BAE can afford to pay out a far greater proportion of earnings as a dividend. Indeed, a figure of two-thirds would certainly not be excessive.
Doing so would increase dividends per share from their current level of 20.3p to 28.2p, which would mean the yield of BAE’s shares would reach around 6.5%. This would be among the highest yield of any stock in the FTSE 100.
That’s assuming the share price stays where it is, when in reality it would be likely to move higher as demand for such a high yield pushed shares north of their current level.
A payout ratio of two-thirds would still leave a considerable sum for reinvestment purposes and could also mean a higher yield (or share price) for investors. Therefore, it could be a sensible move for management to adopt and would doubtless prove popular with shareholders, since it could help them to retire early.
