3 great dividends: Lloyds Banking Group plc (6.8%), Royal Dutch Shell plc (7.3%) & Direct Line Insurance Group plc (5.9%)

How can you miss great dividends from Lloyds Banking Group plc (LON: LLOY), Royal Dutch Shell plc (LON: RDSB) & Direct Line Insurance Group plc (LON: DLG)?

| 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.

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.

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.

Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended BP and Royal Dutch Shell. 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

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

Investing £5,000 in a Nasdaq 100 index fund 5 years ago would be worth this much now

Zaven Boyrazian looks at the Nasdaq 100 index’s performance since December 2019. Has investing in an index fund been good?

Read more »

Electric cars charging at a charging station
Investing Articles

Why the Tesla share price rocketed 38% in November

Our writer considers the reasons for the recent red-hot Tesla share price performance. Is now a good time for him…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
US Stock

Why NIO stock fell 13% in November

Jon Smith flags up a couple of key factors that he believes contributed to the fall in NIO stock over…

Read more »

Investing Articles

Which of these UK stocks is the better bargain in December?

Stephen Wright thinks Diageo and Senior are very different UK stocks with very similar prospects. But which one offers better…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

Mistakes to avoid when investing in the FTSE 100!

The FTSE 100 offers great near-term valuations and dividend yields, but Dr James Fox believes investors should be wary when…

Read more »

Investing Articles

Here’s why the Scottish Mortgage share price jumped 9.2% in November

The Scottish Mortgage share price has been outperforming indexes over recent weeks. Ben McPoland digs into some reasons why.

Read more »

Investing For Beginners

Why the IAG share price rocketed 24% in November

Jon Smith explains why the IAG share price did so well last month, citing three factors at work that helped…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

I think Tesla stock’s overpriced. So why not short it?

Our author thinks Tesla stock has got ahead of itself since the US election. So why not put his money…

Read more »