Finding the market’s best income stocks isn’t easy. Indeed, you shouldn’t buy a stock just because it has a high dividend yield, without first assessing the underlying business and sustainability of the payout.
A dividend cut is an income investor’s worst nightmare. And most of the time, dividend payouts are cut without much warning.
Still, there are some stocks out there that offer higher-than-average dividend yields that are sustainable; you just need to know where to look.
Income and growth
Santander (LSE: BNC) cut its dividend last year to save cash, but even after cutting its payout the bank still supports a dividend yield of 4.2%. The payout is covered two-and-a-half times by earnings per share, so it looks safe for the time being.
What’s more, according to City figures Santander’s earnings per share are set to expand at a rate of 7% to 8% per annum for the next three years. According to the same forecasts, Santander’s dividend payout will increase at a rate of around 10% per annum over the same period.
Special dividends
Over the years, Admiral (LSE: ADM) has built a reputation for being one of the FTSE 100′s dividend champions.
The company’s dividend record is highly impressive. Over the past five years, the group has returned a total of £1.1bn to investors via both regular and special dividends. This works out as around 90% of Admiral’s net income generated over the period.
And analysts expect this performance to continue for the foreseeable future. Figures suggest that Admiral’s dividend payouts will total 95.5p per share for 2015 and 97.3p for 2016, equal to a yield of 6.4% and 6.5% respectively. Looking at the numbers, it seems as if analysts have hiked their dividend forecasts for Admiral’s by around 10% during the past few weeks.
Throwing off cash
Lastly, Aviva (LSE: AV), which is flush with cash after its merger with Friends Life earlier this year.
Specifically, the merger has left Aviva with a £10.8bn capital surplus, covering the company’s insurance commitments by more than 170%. Also, Aviva’s own analysts have stress-tested the company’s balance sheet and believe that, even after a 20% fall in equity values, the group’s economic capital coverage ratio will remain above 170%. Add in the fact that as a result of the Friends Life merger, Aviva’s cash flow will increase by an additional £600m per annum by 2017 and you can see why Aviva’s management had the confidence to hike the company’s dividend payout by 15% when it announced first-half results at the beginning of August.
The City believes that this dividend growth is set to continue for the foreseeable future. Analysts have pencilled in dividend growth of 17% for next year and 16% the year after. These forecasts suggest that, based on today’s prices, Aviva’s shares will support a yield of 4.5% next year and 5.3% during 2017.
