Investors are increasingly looking to income stocks this year as inflation rises. Higher interest rates have also contributed to the movement away from growth stocks to value and dividend-paying shares. Right now, there are plenty of high-paying dividend stocks to choose from. But dividends are by no means guaranteed and sometimes a high dividend yield is unsustainable and should be a warning sign.
Today, I want to look at five income stocks and see how they compare. Synthomer, Steppe Cement, Persimmon, Rio Tinto, and Phoenix Group are all offering big dividends. But which one is best for my portfolio?
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As mentioned, these are some of the highest-paying UK-listed dividend stocks. In fact, Persimmon is expected to be the highest-paying dividend stock on the FTSE 100 this year. Meanwhile, Rio Tinto is expected to pay out the most money (£7.4bn) to shareholders. So, here’s how the five companies rank.
However, big dividends are often not sustainable. So, it’s important to look at other metrics such as dividend coverage.
The dividend coverage ratio indicates the number of times a company could pay dividends to its common shareholders using its net income. The numbers provided below do not necessarily cover the same period of time but are still useful for comparison.
|Stock||Dividend coverage ratio (2021 or latest)|
|Steppe Cement||1.8 (estimate)|
A coverage ratio of about two is generally considered healthy, while anything below 1.5 is considered concerning. However, the ratio isn’t always indicative of dividend health. Phoenix Group recently upped its dividend on the back of record cash generation despite losses in 2021.
Sometimes the promise of sizeable dividend payments can sway the valuation of a company. Investors generally will favour a company providing them with good near-term returns, assuming there aren’t other concerns. But, more generally, I don’t buy stocks for my portfolio that look expensive. So here’s how these five companies stack up by the price-to-earnings (P/E) ratio.
Despite record cash generation, Phoenix Group recorded a loss in 2021. The group noted a negative investment return on hedging positions, as well as increased amortisation charges on intangible assets and higher financing costs.
The figures suggest that Synthomer represents the best value, but comparing P/Es across different industries isn’t a perfect science.
Which is best for my portfolio?
My favourite stock here, and the only one I own, is Synthomer. The company has an incredibly low P/E ratio on the back of surging demand for latex gloves during the pandemic. The stock is trading at pre-pandemic levels but analysts expect demand for its products to remain high. Synthomer’s latest trading update also highlighted an “encouraging start to the year”. The group has created a new adhesives division and has a new chief executive, so there could be some near-term issues, but hopefully nothing major.
The 9.7% dividend yield is certainly inflation-beating and the coverage was strong in 2021. That’s why Synthomer is my pick of the bunch. I’ve recently bought Synthomer shares and would buy more.