With the FTSE 100 index recently reaching the highest levels it’s ever been, dividend yields could start falling soon. But for now, many remain sky-high.
This could be an opportunity to make a killing investing in stocks that pay high dividends and that haven’t yet seen their share prices exploding. Who knows when their yields will be this high again?
However, jumping into any old stocks could be like leaping into a value trap. If the share price falls more than the yield pays out, it’s a waste of time. So I’m looking for dividend stocks that have been tipped by top brokers to buy or outperform.
BT Group
Despite a subdued earnings report last week, confidence in the UK’s main telecoms provider is higher than I’ve seen in months. Both Berenberg and HSBC put in a Buy recommendation on BT Group (LSE:BT) last Friday. This follows similar positive ratings by Deutsche Bank in early May and JP Morgan in April.
The share price jumped 19% on the news, recovering the 18% losses incurred since the year began. But there’s still some way to go — at 132p, the price remains down 16% from last year’s high of 158p. Maybe that’s understandable as BT’s earnings have been declining at an average annual rate of 6.5%, leading to reduced profit margins of 4.1% compared to 9.2% last year.
But things might be looking up.
I’ve held shares in BT Group for a while and only now they’re finally delivering some mild returns. For the first time, I’m hopeful the 6% dividend yield won’t be swallowed by losses. Some forecasts predict earnings growth of 15% per year, with discounted cash flow analysis estimating the shares to be undervalued by 72%.
If that’s correct, it could considering the shares while they’re still cheap.
NatWest Group
NatWest Group (LSE: NWG) has had an amazing year so far, with the shares up 48% year-to-date (YTD). The UK Government recently reduced its stake in the group to below 30%, prompting a £110m investment from US firm Capital Group. Until now, it had avoided NatWest due to the government’s 58% controlling stake following a bailout after the 2008 financial crisis.
But analysts remain sceptical.
On average, they predict earnings will decline at a rate of 2.4% per year, with earnings per share (EPS) expected to fall to around 38p by 2025. If the price-to-earnings (P/E) ratio rises above the industry average of 7.8, the shares could take a hit. But with the rapid and volatile price growth over the past year, a short-term correction wouldn’t be all that surprising.
Still, Deutsche Bank and Barclays put in Buy ratings for NatWest Group earlier this month, which gives me confidence. Not long after, the group announced the repurchase of more shares as part of a £300m buyback programme.
With revenue, EPS and net income all up from last year, I think analysts are too harsh on the bank. And with a 5.3% dividend yield that’s expected to rise to 6% in the next three years, what’s not to like?
In fact, NatWest Group is just one of three dividend stocks I plan to add to my portfolio next month, with the other two being City of London Investment Group and Unilever.
