The share price of drinks giant Diageo (LSE: DGE) (NYSE: DEO.US) has not had a good year. It’s down by 12% over the past 12 months to 1,758p — although we have seen a 75% gain over five years, compared to 40% for the FTSE 100.
Defensiveness
Some of that is probably due to Diageo’s status as a defensive share, which made it a relatively safe haven during the years of recession. But now that the economic future is looking brighter, a lot of the cash that went into such stocks is once again moving to more risky ventures.
But here’s the question — for long-term income investors, is Diageo a good bet? Here’s a look at its dividend situation:
| Year (to Jun) |
Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2011 | 40.4p | 3.2% | 2.07x | +6.0% |
| 2012 | 43.5p | 2.6% | 2.17x | +7.7% |
| 2013 | 47.4p | 2.5% | 2.18x | +9.0% |
| 2014 | 51.7p | 2.8% | 1.85x | +9.1% |
| 2015* |
55.4p | 3.2% | 1.81x | +7.2% |
| 2016* |
60.3p | 3.4% | 1.77x | +8.8% |
* forecast
So-so dividends?
Now, those aren’t particularly impressive yields when compared to the long-term FTSE 100 average of around 3%, and between mid 2011 and early 2013 the yields actually fell significantly due to the appreciating share price.
Forecasts of 3.2% and 3.4% are actually not bad going forwards, even if they’re not up there with the 5% yields and better than some shares are offering.
But the key strength of Diageo’s dividend is not in its absolute yield, but in its year-on-year rises that are running way ahead of inflation. It’s no good getting 5% this year if your annual cash payouts are struggling to beat inflation — a lower yield today but greater long-term growth is likely to get you more cash coming in to your coffers in 10 or 20 years time.
Future yields
The yield that really counts is the effective yield you’ll be getting in the future based on the price you pay today, not the headline yield each year. If you’d bought Diageo shares five years ago at around 1,000p, you’d be looking at an effective forecast yield for for the year to June 2015 of 5.5%, rising to 6.0% a year later — and that’s up there with the best.
And if you don’t actually want to take the cash now, Diageo has a dividend reinvestment plan that will allow you to plough it back into more shares to add to your future income stream.
