Dividend investing has become a really popular strategy. That’s because historic low interest rates mean income investors have increasingly looked towards high yielding stocks as substitutes to low yield bonds.
But dividend payments aren’t guaranteed. Already, nine FTSE 100 companies have announced cuts to dividend payouts since the start of the year. So it’s important to pick stocks with a high level of dividend cover and a track record of delivering dividend growth. These five stocks seem to fit the bill.
Non-cyclical
Imperial Tobacco Group’s (LSE: IMT) shares support a dividend yield of 4.0%, which is backed up by dividend cover of 1.5x. Imperial Tobacco benefits from steady cash flow generation and a high level of cash conversion across the business cycle, which allows it to pay a higher than average dividend yield.
Its track record for dividend growth is impressive with an average annual growth rate of 13.1% over the past five years. The dividend is supported by steadily growing earnings and, despite cigarette volumes declining for a number of years, earnings are rising because of price rises and cost cuts.
City analysts expect Imperial Tobacco’s underlying EPS and dividend to grow by 10% next year, giving its shares a forward P/E of 15.1 and a prospective dividend yield of 4.4%.
Turnaround play
As well as being a dividend stock, BAE Systems (LSE: BA) is a potential turnaround play. Its revenues have been shrinking due to cuts to defence spending by North American and European governments but trading conditions are set to improve. The UK government is increasing defence spending and other countries are likely to follow suit. That’s because of heightened terrorist alerts and the rising threat of international political conflict.
BAE’s dividend yield is currently 4.1%, and the company has maintained or increased its payout in every year since its founding in 1999. Its dividend cover is 1.9x.
Earnings recovery
Right now, Pearson (LSE: PSON) has a respectable dividend yield of 6.9% and a forward P/E of 11.2. But its valuation appears to reflect its dispiriting trend in earnings.
Competition in education publishing is expected to intensify and textbook sales are declining because of fewer college admissions. As a result, underlying earnings fell in the past three consecutive years at an average rate of 8.3%.
However, earnings should recover this year with analysts forecasting underlying EPS growth of 6% and its dividend is covered 1.3x by earnings.
Expected dividend growth of 19.1%
Legal & General Group (LSE: LGEN) has delivered five consecutive years of dividend growth during which time its dividends have grown by an average annual rate of 24.0%. The company has yet to announce its final dividend for the 2015 financial year but analysts expect the company will pay a total of 13.4p per share this year.
This represents 19.1% growth on the previous year and mean its shares currently trade at a prospective yield of 5.0%. Its dividend cover is 1.5x.
Jam today, jam tomorrow
At first glance, house-builder Bovis Homes Group (LSE: BVS) may not look like an ideal dividend stock. Its dividend yield is just 3.2% and housebuilding is a cyclical industry. But it’s generating strong earnings growth and fundamentals are looking good too, with the structural shortage of housing supply likely to keep the sector’s profits high. City analysts expect its dividend will grow by 14.3% this year, to 40.0p, which gives it a prospective yield of 4.0%.
Its dividend cover is 2.2x, and it’s set to widen to more than 2.4x this year.
