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What Dividend Hunters Need To Know About BG Group plc

Today I am looking at whether BG Group (LSE: BG) is an appealing pick for those seeking chunky dividend income.

Dividend growth expected to continue

2014 has already become a year to forget for embattled oil explorer BG Group. The business was forced to slash production estimates for the next two years back in January, as ongoing operational problems in Egypt forced it to declare force majeure in the country. And shortly afterwards chief executive Chris Finlayson announced that he would be leaving the firm with immediate effect.

BG Group has since warned that it expects output this year to come it at the lower range of current estimates — previously put at oil rigbetween 590,000 and 630,000 barrels of oil equivalent per day — and the firm said that its involvement in Egypt is becoming “increasingly at risk” as the government there continues to divert production to the domestic market.

Although current production problems are expected to harm growth in the immediate term — a 13% earnings decline is pencilled in for this year — earnings are expected to surge thereafter, with a compound annual growth rate of 22.7% expected between 2015 and 2018 as output flows from its key projects in Australia and Brazil.

Consequently, City analysts expect the oil play to keep dividend payments trekking steadily higher in coming years. And for the medium term specifically, current forecasts point to an 6.4% rise in the annual payout to 30.6 US cents per share this year, with an additional 11.8% increase pencilled in for next year to 34.2 cents.

Not do strong earnings forecasts provide a terrific omen for dividend expansion, but estimates also keep dividend coverage comfortably above the widely-regarded safety benchmark of 2 times prospective earnings. BG Group boasts figures of 3.7 times and 4 times for 2014 and 2015 and cover is predicted to remain around these levels in coming years.

… but payout yields trail the market

However, investors should be aware that dividend yields remain far below that of the wider market average. Indeed, dividend projections for 2014 and 2015 respectively create miserly readouts of 1.6% and 1.8% correspondingly, well below the FTSE 100 average of 3.2% and surpassed by a figure of 2.6% for the complete oil and gas producers sector.

With yields expected to remain well below the big-cap average for some time to come, I believe that dividend hunters can find much more lucrative income picks elsewhere. And with uncertainty over future production levels also set to rumble on, I believe that earnings — and with it dividend — expansion could also come under fire.

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Royston does not own shares in BG Group.