Temple Bar Investment Trust (LSE: TMPL) has delivered 31 consecutive years of dividend increases, having lifted its latest annual payout by 3%. The trust has a trailing yield of 3.2%.
Picking great dividend shares has helped Temple Bar outperform the FTSE All-Share Index over the past three, five and 10 years.
Not too many equity income funds currently have three banks in their top 10 holdings — especially with one of those banks not presently paying a dividend! But HSBC (LSE: HSBA), Lloyds (LSE: LLOY) and dividend-less Royal Bank of Scotland (LSE: RBS) all feature in Temple Bar’s top 10.
Going against the crowd
Temple Bar takes a contrarian approach, and sees little value in a number of areas of the market that are currently popular with dividend investors. For example, in its latest annual report, the trust said of utilities:
“We believe investors have been attracted to the high dividend yields of utilities. However, these dividends are typically financed partially out of debt rather than cashflow and, therefore, in our view, are not as attractive as they initially appear. Utilities remain highly capital intensive companies continually at risk of political intervention and these dividends may prove less secure than investors believe”.
Another swathe of popular dividend stocks — “quality businesses” — are also currently off the menu for Temple Bar:
“Many of these companies are found in consumer facing sectors such as food, drink, tobacco, personal care and household products. After many years of strong performance, this group of companies is priced as highly as it has been for decades, yet it is questionable whether its future is as bright as its past”.
With so many popular dividend areas of the market rejected, it’s perhaps not surprising that Temple Bar’s contrarian approach — where value can often take some time to emerge — has led the trust to see an opportunity in banks.
HSBC’s shares reached a post-financial-crisis high of pushing £8 in 2013. But they’ve been nearer £6 since, as penalties for past misdeeds have rumbled on, new scandals have surfaced and fears about China’s economy have weighed on sentiment.
As a result of the depressed share price, the dividend yield is high — 5.4% forecast for this year, rising to 5.6% next year. The dividend is covered a reasonable 1.6 times by forecast earnings. HSBC could do with getting its costs down — it’s taking steps to do so — and could offer good value today for long-term investors.
Temple Bar has been invested in Lloyds since before the company’s resumption of dividends, noting shortly before the restart that the Black Horse “moves ever closer to paying a dividend. Once reinstated, this could grow quickly and it is conceivable that the company will have a 5% yield … within two years”.
Lloyds’ shares have lately been making new post-financial-crisis highs. However, investors today could still get Temple Bar’s hoped-for 5% yield within two years on a small pull-back in the shares or a modest upgrade to the analyst consensus forecast. As things stand, the consensus gives a 3.2% yield this year, rising to 4.8% next year.
Royal Bank of Scotland is behind Lloyds in its recuperation from the financial crisis by perhaps a year or two. RBS may or may not be able to resume dividends this year, and not all analysts are optimistic for 2016. As a result, there’s a lowly 1.5% yield forecast for 2016 — covered a whopping 4.7 times by forecast earnings, compared with Lloyds’ 1.9 times and HSBC’s 1.6 times.
At some point, RBS should get into the position Lloyds is currently in. And, at its current share price — which has gone nowhere for a couple of years — the Scottish bank has the potential for a similarly high dividend payout to Lloyds, for patient investors, such as Temple Bar.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.