Every year, the top City analysts produce a chart outlining the best dividend yields on offer in the developed markets consumer goods sector.
This year, Vodafone (LSE: VOD) and GlaxoSmithKline (LSE: GSK) topped the list, Philip Morris — owner of the infamous Marlboro brand of cigarettes — came in third, and Imperial Tobacco (LSE: IMT) fourth, making these three UK-listed dividend champions some of the world’s best income stocks.
Vodafone, Glaxo, Philip Morris and Imperial all top the list of the best income stocks because they have the most stable income streams.
Indeed, other companies like BHP Billiton may offer more attractive dividend yields at present, but due to the cyclical nature of BHP’s business, the company could be forced to cut the dividend at a moment’s notice — something Santander and Centrica shareholders have recently had to grapple with.
Not only do these companies have relatively safe dividend payouts, they also have a history of looking after their shareholders. Vodafone, for example, has returned the vast majority of the cash it has generated from operations to shareholders over the years.
Additionally, special dividends were issued when the company received dividend payments from its US joint venture with Verizon. The company also returned half of the cash received from the sale of the joint venture to investors.
Vodafone’s shares currently support a dividend yield of 4.7%, although the dividend payout of 11.5p per share isn’t wholly covered by earnings per share of 6.3p. Still, City analysts expect the company’s dividend payout to increase steadily in line with inflation over the next three years.
Similarly, Glaxo has a history of returning the majority of its free cash flow to investors. In particular, the company’s dividend yield has averaged 5.2% over the past five years, excluding the benefit to shareholders of any stock buybacks undertaken. This year the group is planning to return an additional £4bn to shareholders following the completion of the asset swap with Swiss pharma giant Novartis.
With around 5bn shares outstanding, a cash return of £4bn is worth around 80p per share. In other words, Glaxo’s investors are set to receive a special dividend of 80p per share this year — excluding the company’s regular dividend payout of 80p per annum.
Finally, at present levels Imperial supports a dividend yield of 4.1%. The payout is covered one-and-a-half times by earnings per share.
Unfortunately, Imperial’s dividend yield is the lowest of the three companies in this article.
However, Imperial’s dividend yield is set to grow rapidly over the next three years. In fact, the payout is set to grow at a rate of around 10% per annum until 2017. Glaxo’s payout is expected to remain unchanged for the next year or two, while Vodafone’s is only expected to grow in line with inflation.
Imperial’s payout growth means that the company is set to yield 4.6% this year, 5.1% during 2016 and 5.6% during 2017. That’s growth worth paying for.
Rupert Hargreaves owns shares of GlaxoSmithKline and Imperial Tobacco Group. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.