With the FTSE 100 trading near record highs, it’s understandably difficult to find dividend stocks at a reasonable price. After the recent run in the stock market, it’s unsurprising that many shares now appear to be overvalued.
Thankfully, there are still some attractive dividend stocks available if you’re willing to look hard enough. Indeed, here are two FTSE 100 names which I believe have the hallmarks for value and income.
First up is ‘Big Six’ energy company SSE (LSE: SSE). With the company trading at just 11.4 times forward earnings, and the shares offering a prospective dividend yield of 7.2%, it certainly looks to offer both value and income.
That doesn’t seem too surprising as investing in utility stocks has long been a go-to option for income investors. As utilities tend to earn steady revenues, they have historically paid reliable dividends to shareholders with relatively low volatility and moderate risk.
However, SSE is particularly attractive because there are a number of bullish catalysts that could come through for the company this year. Most notably, SSE is looking to merge its retail supply business with Npower to create a separately-listed energy company. The merger could generate some significant cost savings for the combined company, allowing it to better compete against rivals.
It would also allow SSE to focus on its power generation and regulated networks businesses, which could lead to a re-rating in the remaining group’s valuation, unlocking value for shareholders.
Although SSE is operating in challenging market conditions, with growing regulatory and political uncertainty, dividends have continued to grow in line with expectations, with a 3.6% increase in its interim dividend to 28.4p. Looking ahead, the company is targeting full-year dividend growth of at least equal to RPI inflation.
The dividend policy also seems sustainable to me with the company working to keep dividend cover within the expected range of around 1.2-1.4 times, although in the short term, it will likely fall towards the bottom of this range.
Investors should also look outside of defensive sectors when searching for reasonably priced dividend stocks. On the whole, cyclical sectors are a lot cheaper than defensive sectors, with many banks, housebuilders and airlines offering yields in excess of 3%.
British Airways-owner IAG (LSE: IAG) is one stock which seems to fit the bill. The stock trades at a mere 6.9 times expected earnings this year and offers a prospective dividend yield of 3.7%.
Sure, the airline industry is highly cyclical and airline companies haven’t historically been the most reliable dividend payers. But now riding on a tide of higher fares and strong global economic growth, airlines are piling up profits and returning more cash to shareholders.
Looking forward, it will be interesting to see if they can ride this momentum into 2018. So far things have gone well though, as earlier this week IAG reported group traffic in December increased by 6.1% year-on-year, after growth of 7.6% and 4.4% growth in November and October.
This will likely translate into meaningful bottom-line improvement, with City analysts expecting group underlying earnings to have grown by 5% in 2017. As such, IAG’s dividend prospects are backed by a promising earnings outlook and robust dividend cover.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.