With inflation creeping higher, the challenge for investors could be to retain an income which is ahead of inflation. In order to do this, dividend growth could become increasingly important in future years. That’s why seeking companies with growing shareholder payouts as well as a high yield could be crucial. However, with uncertainty high and the global economy facing challenges from Brexit and the Trump presidency, dividend cuts cannot be ruled out.
An improving business?
While many UK-listed banks have been able to cut costs and improve their efficiencies since the credit crunch, HSBC (LSE: HSBA) has been left behind. Its operating costs swelled to their highest ever level recently and this prompted a renewed focus on cost reduction. As part of this, HSBC will reduce headcount and seek to become a leaner and more profitable entity. While there is a high chance it will succeed in the long run, it could mean dividend growth is somewhat limited.
At the present time, HSBC has a dividend yield of 6%. However, in 2018 it is forecast to reduce dividends per share by around 1.2%. Assuming inflation reaches around 3% this year according to Bank of England estimates, this could mean that investors in HSBC receive an income which is over 4% lower in real terms in 2018 than in 2017.
While disappointing, dividends are due to be covered 1.4 times by profit in 2018. This indicates that they are sustainable and could begin to rise in future. Clearly, the success of the company’s cost reduction plan will have a major bearing on their growth rate. But with such a high initial yield and scope for a significant improvement in its financial performance, HSBC continues to be a relatively sound income stock for the long term.
Sufficient growth potential?
While Vodafone (LSE: VOD) may have sound growth prospects over the next couple of years, its dividend growth is set to be rather disappointing. For example, dividends per share in financial year 2019 are forecast to be just 0.5% higher than they were in financial year 2017. As such, if inflation hits 3% per annum during the two-year period, it could mean a real-terms reduction in shareholder payouts of 5.5% once inflation is factored- in.
Clearly, this is disappointing for the company’s investors. However, with Vodafone yielding just over 6%, it appears to offer an attractive income outlook in the long run. Its strategy seems to be set to bear fruit after a number of years of reorganisation, asset disposals and partnership agreements. Therefore, post-2019, the prospects for dividend growth appear to be relatively bright.
Unlike HSBC, Vodafone has already become a much-improved business in recent years. Therefore, given its relatively consistent income profile, it could be seen as a defensive stock to hold during periods of uncertainty for the wider stock market and economy. As such, investors seeking a relatively high yield and defensive characteristics due to the threats of Brexit and the Trump presidency may find Vodafone’s outlook to be relatively attractive.
