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3 Hot Dividend Stocks: Vodafone Group plc, BAE Systems plc And Severn Trent Plc

Vodafone

The last few years have been exceptionally difficult for Vodafone (LSE: VOD) (NASDAQ: VOD.US), with the telecoms company struggling to generate bottom line growth as its high concentration to the troubled Eurozone economy has held it back. However, with the green shoots of recovery set to become evident following the ECB’s decision to initiate quantitative easing, Vodafone’s earnings are forecast to rise by 20% next year.

This is great news for the company’s dividends, and means that the current yield of 5.4% looks to be a little more sustainable. Certainly, investors in the company should not expect a rapidly growing dividend but, with inflation being just 0.3% in the UK, such a high yield is still very attractive and is likely to remain so over the medium term. This, plus the prospect for improved earnings, makes Vodafone a great income stock.

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BAE

Over the next two years, BAE (LSE: BA) (NASDAQOTH: BAESY.US) is forecast to increase dividends per share by 2.9% per annum. This means that, even if inflation returns to more ‘normal’ levels, then BAE is likely to still offer its investors a real-terms increase in income moving forward. And, with BAE currently yielding an impressive 3.9%, it looks to have a bright future as an income stock.

In addition, BAE’s current dividends could rise due to it having a rather modest payout ratio. For example, BAE currently pays out 53% of its profit as a dividend and, while not mean, it is not particularly generous either. In fact, it could easily afford to pay out around 75% of profit as a dividend and still leave sufficient capital to reinvest in the business. This means that BAE’s future dividend growth prospects are very strong, since it could afford to increase them at a faster rate than profit growth over the medium to long term.

Severn Trent

It’s been a disappointing month for investors in Severn Trent (LSE: SVT), with the prospect of higher interest rates causing investor sentiment to weaken somewhat. That’s because higher interest rates mean that Severn Trent’s substantial debt pile could become more expensive to service.

However, the water services company remains a very appealing income stock. That’s because, as well as a yield of 4.1%, it is expected to increase dividends by 2.9% next year and this means that it should offer a significant real terms increase in shareholder payouts over the medium term.

Furthermore, Severn Trent remains a very stable company with a highly predictable top and bottom line. As such, the chances of a severe dividend cut are slim and it is likely to continue growing dividends by at least the rate of inflation in the long run. As such, it’s a great stock to buy and hold for the long term, with the possibility of a bid approach offering capital gain potential, too.

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Peter Stephens owns shares of BAE Systems. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.