Reliable dividend stocks could well become increasingly popular with investors, because inflation is running at 3% and interest rates are forecast to move only slowly higher. It’s generally the case that higher-yielding companies grow their dividends at a relatively pedestrian pace, while lower-yielders increase their payouts faster. A portfolio with a good balance of carefully chosen stocks across the spectrum should be capable of providing both an above-average yield and growth comfortably ahead of the rate of inflation.
Vodafone (LSE: VOD) is one high-yielder I’d buy today, while pubs group Fullers (LSE: FSTA), which released a trading update this morning, is a robust dividend-growth stock I’d also be happy to purchase.
Yin and yang
The table below shows some historical and forecast dividend data for both companies, illustrating their different dividend profiles.
|2015||2016||2017||2018 est.||2019 est.||2020 est.|
|Vodafone dividend||11.22p||11.45p (14.48¢)*||14.77¢||15.07¢||15.41¢||15.92¢|
|Vodafone dividend growth||2.0%||2.0%||2.0%||2.0%||2.3%||3.3%|
|Fullers dividend growth||9.9%||7.8%||5.0%||5.3%||5.6%||5.7%|
* Vodafone changed its reporting currency to euros in 2017 with the exchange rate of 11.45p/14.48¢ for 2016 providing the base for future dividends declared in euros.
At a current share price of 228p (and at current exchange rates), Vodafone offers a 5.75% dividend yield based on the forecast payout for 2018. Set against this high yield, dividend growth has been — and is forecast to be — relatively modest. This is the opposite of Fullers, where markedly higher dividend increases come with a lower yield. The forecast 2018 payout for the pubs group gives a yield of 2% at a current share price of 976p.
Different profiles in terms of yield and growth don’t make one company an inherently better investment than another. I mentioned earlier that carefully chosen stocks of each type can be blended with the aim of producing both a superior starting yield and inflation-busting growth. But I’ll explain briefly now why I believe Vodafone and Fullers both merit the ‘carefully chosen’ qualification.
With high-yield stocks, the risk of a dividend cut is a primary consideration. Vodafone has come through a period of transition and heavy investment, during which the risk of a cut was somewhat elevated. However, while the payout remains uncovered by accounting earnings, the group’s free cash flow has advanced rapidly of late. In fact, management has upgraded previous guidance of “around €5bn” for the current year to “exceed €5bn.”
Vodafone’s dividend is looking increasingly secure and with the massive investment of recent years boding well for the future, I’m inclined to agree with my Foolish colleague Royston Wild who named the telecoms colossus as a FTSE 100 dividend stock he’d buy and hold forever.
A toast to a special dividend record
Fullers said in its trading update today that it had delivered “a solid performance” over the 42 weeks to 20 January, despite “what remains a challenging trading environment.” Management referred to “our long-term vision and prudent financing” in looking to the future. These are qualities the company has always possessed.
I’ve previously written in some detail about its long history, which includes an extraordinary record of increasing its dividend for over seven decades, making it an unsung hero in my eyes and a blue-chip dividend growth stock well worth buying for the long term.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
G A Chester has no position in any of the 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.