The fall in stock markets since the summer means there’s an abundance of FTSE 100 companies currently sporting high dividend yields. Indeed, around a sixth of the index’s constituents are showing prospective yields of over 7%, with a few even into double figures.
When a company’s shares are sold off to push its yield so high, it strongly suggests the market sees a very real risk of the dividend being cut. However, the market doesn’t always get it right. My top Footsie high-yield picks for 2019 and beyond aren’t the very highest in the index, but they’re both above 7%.
I see the risk/reward balance as favourable in the case of these two companies. If their dividends do prove sustainable, investors at current prices will not only lock in a high income in perpetuity, but also see big capital gains when the market reverses its negative view, and pushes the share price up until the yield reverts to a more normal level.
Phone a friend
In its half-year results released last month, telecoms giant Vodafone (LSE: VOD) maintained its interim dividend at the same level as the prior year, and said it also expects to maintain the full-year payout at the same level. This is €0.15 a share (13.5p at current exchange rates). The share price is 158p, as I’m writing, so the yield is 8.5%.
The market is concerned about the sustainability of Vodafone’s dividend for a number of reasons. The Footsie company has agreed to acquire US group Liberty Global‘s operations in Germany, the Czech Republic, Hungary and Romania for €18.4bn. At the same time, investment in spectrum is set to be at a more elevated level than usual over the next couple of years. Meanwhile, the group is seeing “challenging competitive conditions” in some of its markets, notably Italy and Spain.
My glass-half-full view is that Vodafone’s balance sheet can just about stomach the additional debt needed for the acquisition and temporarily-elevated spectrum costs, and that these investments actually bode well for growing free cash flow (and the dividend) in the longer term. On the near-term trading outlook, management has said it’s already taken “decisive commercial and operational actions” to respond to conditions in Italy and Spain. Furthermore, it’s upped its guidance on free cash flow (pre-spectrum) for its current financial year to “c.€5.4 billion (previously ‘at least €5.2 billion’).” For these reasons, I’m persuaded to rate the stock a ‘buy’.
10 out of 10
Tobacco group Imperial Brands (LSE: IMB) released its annual results last month, and increased its dividend by 10% for a 10th consecutive year. The payout of 187.79p a share gives a yield of 8% at a current share price of 2,358p. And with City analysts forecasting another 10% uplift for fiscal 2019, the prospective yield rises to 8.8%.
As with Vodafone, the market is concerned about the sustainability of Imperial’s dividend for a number of reasons. Key worries are the structural decline in volumes across the tobacco industry, and the threat of ever-increasing regulation of not only traditional tobacco products, but also next-generation products.
My glass-half-full view is based on the tobacco industry’s ability to mitigate declining volumes by increasing prices, and its long historical record of thwarting, delaying or overcoming all the many obstacles regulators have thrown at it. It’s on this basis that I rate Imperial a ‘buy’.
