Market volatility was a key theme for financial markets in 2015 and it looks like the road ahead for 2016 will most likely be more of the same.
Investors need to brace themselves for more uncertainty in 2016, as economic growth around the world remains frustratingly weak and commodity prices seem set to stay lower for longer. In addition, there are also risks coming from possible interest rate hikes, slowing credit growth in emerging markets and political uncertainty in the form of the UK’s EU referendum.
With another year of volatile markets to come, investors need to protect the value of their portfolios. Diversification, buying low beta stocks and holding more cash are the well-known strategies to weather volatile markets. However, buying reliable dividend stocks is perhaps most often overlooked.
Stocks that consistently pay out much of their earnings as dividends tend to have stable business models and wide economic moats. And this usually means these stocks are less volatile than most.
Now, let’s take a look at these three high-yielding shares…
GSK: ready for a rebound
The non-cyclical nature of the healthcare sector means that GlaxoSmithKline (LSE: GSK) reliably generates stable cash flows. But thanks to patent expiry of some of its blockbuster drugs, investors are becoming increasingly concerned over whether the company can return to growth.
Underlying EPS is expected to have fallen some 20% in 2015 and the company has frozen its dividend at 80p per share. However, analysts expect earnings will rebound this year – by 11% – to 84.3p per share.
This means GSK is currently trading on a forward PE multiple of 15.8 times its expected 2016 earnings, and its shares yield 5.8%.
Vodafone: positioned for growth
Telecoms giant Vodafone (LSE: VOD) operates around the world and this global reach helps to insulate it from downturns in any single market. The company operates on a truly massive scale – generating £42.2bn in annual sales and almost £2bn in operating profits.
Vodafone’s strong balance sheet, as demonstrated by its net debt-to-EBITDA ratio of two times, means it’s well placed to deliver inflation-beating dividend growth. This is particularly important now as earnings for the mobile network operator remain sluggish due to ongoing difficult trading conditions in Europe.
So, although first half operating profits fell 6.5%, it’s in a position to raise dividends. Analysts forecast dividends will be 2.7% higher this year, at 11.5p per share. Its shares currently trade at a forward P/E of 45.6 and have a prospective dividend yield of 5.3%.
National Grid: slow but steady
Utility stocks are known for their stability and National Grid (LSE: NG) is perhaps the most stable of them all. The company’s monopoly in the regulated national electricity transmission network results in the company earning “rent-like” cash flows, which vary only slightly with each year.
This explains why National Grid is one of the least volatile stocks in the FTSE 100 and has one of the lowest betas in the market. National Grid has a five year beta of just 0.34, meaning a 1% shift in the stock market typically has the effect of moving shares in National Grid by just 0.34%.
However, National Grid isn’t a cheap stock and earnings growth is dreadfully slow. Analysts expect earnings will grow by 4% this year and by 2016/17, growth will slow to just 1%. Its shares trade at 14.9 times its expected 2015/16 earnings and yield 4.6%.
