Do Lloyds Banking Group PLC And Burberry Group plc Have The Best Dividends In The FTSE 100?

Roland Head explains why Lloyds Banking Group PLC (LON:LLOY) and Burberry Group plc (LON:BRBY) could be hot buys for income investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When markets fall heavily, good dividend stocks really show their value. Short-term dips in the value of your shares seem less important if dividend cash is continuing to flow into your share account.

I’ve been hunting through the FTSE 100 for top quality dividends to consider adding to my portfolio. In today’s article, I’ll consider whether the dividends available from Lloyds Banking Group (LSE: LLOY) and Burberry Group (LSE: BRBY) are enough to make these shares a buy.

Burberry

If you’re an income investor, then I believe that upmarket fashion brand Burberry could be worth considering for your portfolio.

Although Burberry’s forecast dividend yield is fairly average, at 3.1%, this is a high quality payout that seems very unlikely to fall. Over the last five years, Burberry’s dividend has been covered at least 1.5 times by free cash flow every single year. That’s an outstanding record.

Underlying Burberry’s payout is a high quality business. The firm’s operating margin has averaged about 18% over the last five years, while return on capital employed has averaged 32%.

Burberry’s balance sheet has almost no debt and the firm has net cash of £458m. Such a strong financial position means that shareholders don’t need to worry that Burberry will have to cut its dividends in order to meet interest payments if trading slows.

It’s also worth considering Burberry’s record of dividend growth. The shareholder payout has risen by a whopping 1,070% since 2003! Since 2010, the payout has risen from 14p per share to 35.2p per share, a 151% increase.

Although dividend growth does appear to be slowing, Burberry’s focus on a sustainable dividend is very reassuring to me.

In my view, the firm’s track record suggests that dividend growth could accelerate again in the future. In the meantime, I believe that this could be one of the safest dividends in the FTSE 100.

Lloyds Banking Group

As I write, shares in Lloyds are just managing to top 60p and last week they dropped below 60p. A few months ago this seemed hard to imagine. The government was steadily selling its remaining stake in the bank and private investors were looking forward to a discounted share offer later this year. However, the big banking sell-off has put paid to these hopes for the time being.

Lloyds shares have fallen by 18% so far in 2016 and now trade less than 10% above their tangible net asset value of 55p. Lloyds’ balance sheet also looks strong, with a common equity tier 1 ratio — a key regulatory measure — of 13.7%. That’s higher than most of the bank’s UK-listed peers.

What’s interesting to me, as a potential buyer of Lloyds’ stock, is that analysts’ earnings forecasts haven’t fallen in line with the bank’s share price. Forecasts for Lloyds’ 2016 earnings per share have only fallen by 3.8% since December. That doesn’t seem enough to justify a sell-off.

Indeed, based on 2016 forecasts Lloyds now looks an attractive income buy. The bank’s shares trade on a forecast P/E of 8.0 and offer a potential yield of 6.2%. Lloyds could be a strong buy for dividend hunters, in my opinion.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d aim to build wealth the same way as Warren Buffett

Christopher Ruane looks at some of the principles used by billionaire investor Warren Buffett and explains why he also uses…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Dividend Shares

Here’s my 2024/25 dividend forecast for National Grid shares after their recent 17% plunge

National Grid shares could still be a good choice for income, even after the recent seven-for-24 rights issue, says Edward…

Read more »

photo of Union Jack flags bunting in local street party
Top Stocks

5 quality UK stocks to consider buying for the new ‘British ISA’

In theory, a British ISA would allow investors an additional £5k (on top of the standard £20k allowance) so long…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

4.24% yield and a P/E of just 12.1! Tesco shares look like a no-brainer buy for me

Harvey Jones thinks Tesco shares look good value after today's solid first-quarter results. He's now saving up to buy the…

Read more »

Market Movers

Why the Raspberry Pi share price is on everyone’s minds right now

Jon Smith reviews the 14% jump in the Raspberry Pi share price today as part of the successful IPO of…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 UK stocks that could do well out of the general election

Jon Smith runs the rule over two UK stocks that may benefit from higher spending on healthcare, consumer staples and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Could this undervalued growth stock be the next big success story in US tech?

Shares of this US technology giant have collapsed almost 50% in 2024, but is the growth stock now an incredibly…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

After soaring 35% this year, is there still value in Barclays shares? Here’s what the charts say!

Barclays has been on a tear in 2024. But where does that leave investors considering buying some shares now? This…

Read more »