This Week’s Top Blue-Chip Income Buy: Diageo plc

DiageoI’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.

Right now, I reckon Diageo (LSE: DGE) (NYSE: DEO.US) is looking a great buy for income.

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Income investors naturally tend to look towards shares offering a high yield. But that can mean lower dividend growth, and sometimes a cut around the corner. I think there’s always room in an income portfolio for a few companies with a more average yield, but a rock-solid history of good, steady dividend growth.

International drinks giant Diageo, owner of top brands, such as Johnnie Walker, Smirnoff and Baileys, is highly prized by investors for its defensive qualities. The company’s shares typically trade at a premium price with a below-market-average dividend yield.

A great opportunity right now

I think Diageo is a great income buy on the rare occasions when the market offers the stock on a yield at or around the market average. That’s the case right now with the shares trading at a 52-week low of 1,765p at the time of writing.

The market has known for some time that Diageo’s been affected by weakness in emerging economies — including anti-extravagance measures in China — and adverse exchange rates.

Annual results for the company’s financial year ended 30 June, released yesterday, put numbers on the impact. Earnings per share (EPS) were down 7.6p to 95.5p. Foreign exchange movements hit EPS by a whopping 10p. Management told us:

“The catalysts for a near term recovery of consumer spend in the emerging markets are still weak however the future growth drivers for this industry, its aspirational nature as consumers in the emerging markets see increasing disposable income, are undiminished”.

The Board was confident enough to raise the annual dividend by 9.1%, and anyone investing before 13 August will pick up the 32p final dividend, announced in the results.

Diageo’s 10-year dividend record now stands as follows:

Year Dividend growth (%)
2005 7.1
2006 5.2
2007 5.1
2008 5.0
2009 5.1
2010 5.5
2011 6.0
2012 7.7
2013 9.0
2014 9.1

If the Board increases the current year’s dividend at the same rate as of late — and I see no reason why not — we’d be looking at a prospective yield in line with the FTSE 100’s average of 3.2%, which, as I said earlier, is my Diageo value marker for income investors.

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G A Chester has no position in any shares mentioned.