With the FTSE 100 once again trading above 7,500, it’s getting harder to find attractively-valued dividend stocks. Thankfully, despite the generally expensive market, there are still some high-quality blue-chip dividend stocks out there that would make great income investments.
Indeed, here are three FTSE 100 stocks which offer a tempting combination of both low P/E multiples and high dividend yields.
Cash flows
High yield stocks tend to come from sectors which produce strong cash flows, and this explains why the integrated oil & gas majors pay some of the biggest dividends. Unsurprisingly, with a dividend yield of 5.3%, BP (LSE: BP) accounted for roughly 7% of the FTSE 100’s total dividend payments last year.
With profits bolstered by higher oil prices, I expect BP’s share of FTSE 100’s dividend pie would rise higher. Underlying replacement cost profit for the first half of 2018 more than doubled to $5.4bn, against last year’s figure of $2.2bn. Meanwhile, the price of Brent crude oil has continued to trend higher.
In the absence of any major acquisitions, BP looks set to produce more operating cash flow than it can reinvest in the business. Some of this excess cash flow could be put to use in cutting its debt pile — which is only starting to decline. But that still leaves plenty of room for the company to grow its payout.
Valuations are undemanding too, with shares in BP trading at a forward P/E of 11.2, against the FTSE 100’s average of 13.0.
Special dividends
Elsewhere, housebuilder Taylor Wimpey (LSE: TW) is another stock to watch out for. The stock is down 16% since the start of the year, and this has helped to lift its forecast dividend yield for the current year to 9.3%.
Although this high yield comes mostly in the form of special dividends, which clearly shows that management is making no such commitment to maintain payouts at such a high level indefinitely, current payouts are backed by robust earnings and a strong balance sheet. In fact, Taylor Wimpey has just over 9% of its market value tied up in cash, with a net cash position of £525m as at 1 July.
Despite a slowing housing market, City analysts expect underlying EPS growth of 4% in each of the next two years. Based on these figures, the shares are trading at a forward P/E of 9.1, an undemanding multiple which reflects significant Brexit-related uncertainty surrounding the sector.
Turnaround play?
Standard Life Aberdeen (LSE: SLA) is another beaten-down stock. Since the start of the year, shares have fallen by nearly 30%, as investors pulled a net total of £16.6bn from the asset manager.
Amid rising competition from passive funds, and recent regulatory changes, conditions for the asset management industry continue to be challenging. This has driven recent fund outflows and fee compression, which have squeezed profits. However, things may soon be about to stabilise, as structural tailwinds from the growing UK pension market create growth in the industry.
What’s more, Standard Life Aberdeen is set to reap the benefit of roughly £350m in annual cost-savings from synergies generated by its merger with Aberdeen Asset Management, as it seeks to remove complexity and duplication in its operations.
Shares in the company trade at 12.4 times its expected earnings in 2018, and offer a forecast dividend yield of 7.4% this year.
