With the FTSE 100 still in the doldrums at 6,174 points, having lost 11% over the past 12 months and gaining only 5% over five years, what’s the best way to take advantage?
Look for the best dividend yields, I say, because as well as finding companies that have the cash to provide their shareholders with income, it can also highlight those whose shares are unfairly depressed.
Solid liquidity
I reckon Lloyds Banking Group (LSE: LLOY) offers one of the best, with a 6.8% yield forecast for the current year. I do feel a little caution over the rate of recovery of Lloyds’ dividend after the bank was first allowed to start handing out cash in 2014, and I wonder if a slightly more conservative approach might have been better for the long term.
But the speed at which the bank has hiked its dividends does suggest it is confident in the strength of its balance sheet, and its liquidity ratios all look solid. The dividend would be covered 1.7 times by forecast earnings this year, and the mooted rise to 7.9% next year would see 1.5 times cover — and I really wouldn’t like to see cover drop any lower than that.
The high yield is partly down to Lloyds shares having fallen 25% over the past year, to 66p, and that gives us a forward P/E of only 8.5 based on 2017 forecasts — which I think makes Lloyds’ dividend a very cheap one.
Oily cash
The big question hanging over the dividends at Royal Dutch Shell (LSE: RDSB) is whether they will be maintained, especially as this year’s forecast 7.3% yield would be nowhere near covered by earnings.
But with EPS set to bounce back in 2017, the 7.2% yield currently predicted for that year would be just about covered. And with rival BP insisting it will keep its annual payments going, I doubt Shell will want to break ranks. In fact, Shell has already announced a first-quarter dividend of 4.55p per share, and if we see the second payment maintained in July’s interim results I think that will raise confidence for the full year.
And the further oil prices recover, the more confidence we’ll surely have — Brent Crude is already at $48 per barrel, and how long will it be before it breaches the $50 level? I’m hoping Shell’s yield will drop, but only when Shell shares recover from their current price of 1,759p.
Insurance winner
If you harbour any doubts about the insurance sector’s ability to generate cash, take a look at Direct Line Group (LSE: DLG). Last year’s dividends were boosted by a special payment of 27.5p per share from the sale of the firm’s International division, but even without that we saw a total yield of 5.5% on the company’s year-end share price.
Direct Line has a policy of growing its regular dividends ahead of inflation, and also of paying back surplus cash in the firm of special dividends. This year we have a total yield of 5.9% forecast, on the current share price of 375p, and the City is expecting that to rise slightly to 6% in 2017 — and it looks to me like the cash should be able to support decent special dividends into the future quite nicely.
Direct Line shares appear to have had a pretty erratic 12 months, having lost 3.5% so far in 2016. But that’s been in line with ex-dividend dates, and so the reality is smoother than it looks. Right now, we’re looking at a forward P/E of around 13, which is relatively high in the insurance business — but for Direct Line’s levels of dividends, I’d call it good value.
