This year’s manic market conditions have highlighted the benefit of owning stocks that pay reliable dividends. It’s much easier to ride out dips in the market if you can still see dividend cash flowing into your share account.
Although some oil and mining stocks currently offer tempting forecast yields of more than 8%, I expect at least some of these payouts to be cut. For this article, I’ve ruled out commodity stocks and focused on shares offering yields of about 6%, a level which is more likely to be sustainable.
Relentless focus
Shares in electricity and gas utility SSE (LSE: SSE) have fallen by 13% over the last year, exactly matching the decline of the FTSE 100. Yet over the last five years, during which the FTSE 100 has stood still, SSE shares have risen by 20%.
One reason for this is SSE’s relentless focus on dividend growth. The company’s policy is to increase its dividend by at least RPI inflation every year. This record is unbroken, but dividend growth has slowed over the last few years, as SSE’s earnings have stagnated.
However, SSE recently confirmed that earnings per share are expected to rise to 115p this year. This should provide adequate cover for the forecast dividend of 90p per share. This is 2% above last year’s payout and implies a dividend yield of 6.4%.
Current forecasts suggest that SSE’s earnings per share will be fairly flat in next year. This suggests to me that the dividend should also be safe. In my view, SSE is a tempting buy for income.
Hold fire
I’m cautious about investing in high street retailers, but I’m willing to consider NEXT (LSE: NXT) thanks to its growth record and excellent financial management.
The fashion chain is expected to pay a total dividend of 397p per share for the year that ended on 24 January, giving a prospective yield of 6.0%. For the 2016/17 financial year, a payout of 404p per share is expected.
I should explain that this is expected to include Next’s ordinary dividend of about 150p per share, plus one or more special dividends. However, Next’s share price has recently fallen below the firm’s share buyback threshold. This means that Next may opt to spend more on share buybacks and less on special dividends in the coming year.
If you have a preference for cash dividends over buybacks, you may want to hold fire until the firm provides more detailed guidance with its results in March.
Sweet spot
Big housebuilders such as Taylor Wimpey (LSE: TW) are in a sweet spot at the moment. Rising sales are generating a lot of free cash flow and record profit margins.
As a result, dividend yields are high. Taylor Wimpey is expected to pay a dividend of 11.3p per share for 2016, a 17% increase on the firm’s 2015 forecast payout of 9.6p. With net cash and attractive free cash flow, Taylor Wimpey shouldn’t have any problem affording its 2016 payout.
The problem is that the UK housing market is reliably cyclical. Housing sales and prices will eventually slow. Taylor Wimpey only restarted full-scale dividends payments again in 2015 after running into serious financial problems in 2008/9. I wouldn’t choose this stock as a bulletproof income buy.
