3 Top Dividend Stocks To Buy Today? Tesco PLC, Carillion plc And Imperial Tobacco Group PLC

Will these 3 stocks boost your income in 2016? Tesco PLC (LON: TSCO), Carillion plc (LON: CLLN) and Imperial Tobacco Group PLC (LON: IMT)

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Shares in support services company Carillion (LSE: CLLN) are up by over 4% today after it released an upbeat pre-close trading update and announced £1bn in new deals. Crucially, Carillion is on track to meet its expectations for the full-year. While the company’s management team remains cautious, it’s seeing signs of improvement – especially in the UK.

Encouragingly, Carillion now has a pipeline of contract opportunities that’s expected to increase to over £41bn in value. And with it having a high level of revenue visibility for 2016 of 80%, Carillion is moving into next year in a stronger position than for some time. This should provide the market with a degree of confidence in its future potential and could prove to be the start of a gradual upward rerating to its valuation.

On this front, there’s tremendous scope for improvement. Carillion currently trades on a price-to-earnings (P/E) ratio of just 9.2 and while earnings growth in the low single-digits over the next couple of years is rather pedestrian, the long term prospects given an improving UK economy mean that it appears to merit a higher valuation.

In addition, Carillion currently yields a whopping 5.7% and with dividends being covered 1.9 times by profit, there’s vast scope for a rise in shareholder payouts in 2016 and beyond. That makes Carillion a very enticing income play at the present time.

The empire strikes back

Similarly, Imperial Tobacco (LSE: IMT) also holds huge dividend appeal. Its shares yield 4.4% at the present time and with this being more than 10% higher than the wider index’s yield, Imperial remains a relatively desirable income play. Allied to a high yield is a bottom line that’s due to rise by 10% next year, offering significant scope for a rising dividend over the medium term.

Imperial also has a relatively modest payout ratio given its status as a mature company operating in a mature industry. In fact, it pays out just two-thirds of profit as a dividend and this provides it with tremendous scope to deliver rapidly rising shareholder payouts in 2016 and beyond.

Take a second look

Meanwhile, Tesco (LSE: TSCO) doesn’t appear to be appealing from an income perspective at first glance. Its shares yield just 0.3% and even though dividends are due to more than treble next year, this still leaves Tesco with a prospective yield of just 1.1%. That’s lower than the rate of inflation and lower than the best savings accounts – even on a net basis.

But beyond next year Tesco has the potential to become a relatively appealing income stock. That’s partly because it’s due to have a payout ratio of only 18% even after next year’s planned dividend hike. This means it could afford to raise dividends at a much faster rate than profit growth in the coming years.

Not that profit growth prospects look weak. Tesco has huge potential due to a refreshed strategy and an improving UK consumer outlook that could boost the company’s financial performance. And, with Tesco’s bottom line expected to rise by 78% next year, the impact of those factors could come a lot sooner than was expected earlier this year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Carillion, Imperial Tobacco Group, and Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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