In today’s low-interest rate world, it’s difficult to find undervalued dividend champions. The rush for yield has sent investors charging into dividend stocks globally and now you have to do your homework if you want to find a high, sustainable dividend yield with room for growth.
It’s generally accepted that if a stock has a dividend yield more than the market average, the market believes the payout is unsustainable. This isn’t always the case however, and there are plenty of companies out there with a dividend yield more than the FTSE 100 average, which are unlikely to cut their payout any time soon.
National Grid (LSE: NG) and AstraZeneca (LSE: AZN) are two great examples. At present, the FTSE 100 supports an average dividend yield of 3.7%, but both of these dividend champions yield more than 4%. There appears to be no risk to either company’s dividend payout either.
The UK’s best dividend stock?
National Grid is probably the UK’s top dividend stock. The company runs the country’s electricity distribution network, a highly defensive business with almost no competitors. Pre-tax profits have grown steadily in line with inflation over the past decade, and thanks to margin expansion earnings per share have increased by more than 20% since 2012.
Management has steadily increased National Grid’s dividend payout per share to investors in line with earnings per share. Since 2012 the payout has grown by around 10% and the payout is currently covered 1.5 times by earnings per share. This conservative dividend policy gives the company plenty of flexibility. If earnings begin to fall, there will be no immediate pressure on the payout.
At present, the shares support that dividend yield of 4%, which is significantly more than the interest rate you get on most savings accounts today. City analysts expect the payout to rise by 1p per share or 2% next year. Shares in National Grid currently trade at a forward P/E of 17.1.
Stuck in a rut
AstraZeneca’s dividend payout has been stuck in a rut for the past five years. Management took the prudent decision to hold the payout at a certain level back in 2011 when earnings began to slide after the company lost the exclusive manufacturing rights to some key treatments. Pre-tax profits have more than halved over the past five years, yet the company’s dividend payout to shareholders remains well covered by earnings per share.
Specifically, shares in the company currently support a dividend yield of 4.2% and the payout is covered 1.5 times by earnings per share. Unfortunately, City analysts expect Astra’s earnings per share to fall a further 3% this year and 3% for 2017. Still, even after these declines the dividend will remain covered around one-and-a-half times by earnings per share. Shares in Astra currently trade at a forward P/E of 16.7.
