The London Stock Exchange is home to many dividend stocks. However, not all are created equal. To find the best UK dividend stocks, you need to do your research.
Here, I’m going to highlight two FTSE 100 shares that stand out to me as top UK dividends stocks. Both have attractive yields, good long-term dividend track records, and potential for capital growth too.
A top UK dividend stock with a yield of 4%+
One UK dividend stock that has a lot of appeal, in my view, is BAE Systems (LSE: BA), the defence, aerospace, and security company.
BAE Systems’ recent half-year report for the six months to the end of June showed the business has momentum right now. For the period, sales increased by 6% on a constant currency basis to £10bn. Meanwhile, underlying earnings per share increased 25% to 21.9p. On the back of these results, the company announced a 5% increase to its interim dividend as well as a new share buyback programme of up to £500m.
Zooming in on the dividend, analysts currently expect BAE to pay out 24.6p per share for 2021. At the current share price, that equates to a yield of 4.3%. That’s very attractive, to my mind. Dividend coverage this year is expected to be around 1.9 times, which indicates there’s a low chance of a dividend cut.
There are risks to the investment case here, of course. One is that defence budgets could be reduced. This could hit revenues and ultimately, dividends.
With the stock trading on a forward-looking P/E ratio of just 12 however, I think the risk/reward proposition here is attractive. It’s worth noting that analysts at JP Morgan just raised their target price to 645p – 12% above the current share price.
Income and capital growth
Another FTSE 100 share that stands out to me as a top UK dividend stock is Smith & Nephew (LSE: SN). It’s a leading healthcare company that specialises in orthopaedic implants. This company has an amazing dividend track record – it has paid an ordinary dividend to investors every year since 1937.
However, Smith & Nephew was impacted by Covid-19 but it’s now making a strong recovery. For the six months to 3 July, the company generated revenue of $2.6bn, up from $2.0bn in H1 2020. Meanwhile, earnings per share amounted to 23.4p versus 11.5p in H1 2020. Looking ahead, the company said it’s targeting revenue growth of 10-13% for the full year.
The dividend yield here isn’t the highest. Currently, the stock’s prospective yield is about 2%. However, the smaller yield doesn’t put me off. With the company well-placed to benefit from the world’s ageing population, I think the lower yield will be offset by capital gains in the long run.
One risk here is competition. Smith & Nephew is up against some bigger US rivals, such as Stryker and Zimmer Biomet. These companies could steal market share.
Overall however, I think this UK dividend stock has a lot of appeal. Analysts at Credit Suisse have a price target of 1,805p for SN – 31% above the current share price.
