With interest rates set to stay low over the medium term, dividend stocks are likely to remain an important part of Foolish portfolios for many years to come. After all, the return on cash balances is low and may move lower if further stimulus is required following a negative outcome to the Greek debt crisis.
Of course, many stocks have high yields, but not all companies offer the stability and consistency of dividend payments that domestic energy supplier, SSE (LSE: SSE) does. For example, SSE has increased dividends in each of the last four years and, looking ahead, even if the macroeconomic outlook worsens, it is likely to continue to do so over the medium to long term. That’s simply because SSE’s revenue and profitability are less highly correlated with the macroeconomic outlook than the majority of its FTSE 100-listed peers.
Similarly, AstraZeneca (LSE: AZN) (NYSE: AZN.US) has an earnings growth profile that is less cyclical than most of its index peers. The challenge for the company, though, has been in overcoming the patent cliff that has caused its top and bottom lines to fall heavily. As a result, share buybacks have been cancelled and the company’s focus has been on acquiring new drugs to replace the ones for which patents have expired.
However, throughout this challenging period, AstraZeneca has maintained dividend payments at a relatively consistent level. For example, they have been around 183p per share in each of the last four years and, looking ahead, are set to remain at that level in both the current year and next year. Certainly, this has equated to a fall in real terms in the value of AstraZeneca’s shareholder payouts but, with the company’s financial situation on the up, it is likely that it will begin to increase dividends from 2017 onwards.
Of course, more cyclical companies can also offer excellent dividend potential, too. For example, engineering distribution company, Premier Farnell (LSE: PFL), is a relatively cyclical company which is much more dependent upon the performance of the wider economy than SSE or AstraZeneca. However, it has been able to maintain a steady dividend in the last five years and, during that time, it has paid out around 25% of its valuation from five years ago in dividends. And, looking ahead, its dividend coverage ratio of 1.4 indicates that its shareholder payouts are highly sustainable and have scope to rise as the global economic outlook improves.
So, while life is tough for savers at the present time, stocks such as AstraZeneca, SSE and Premier Farnell can make a real difference to your income levels. Their respective yields of 4.4%, 5.8% and 6.1% are hugely appealing and, as mentioned, appear to not only be sustainable moving forward, but have scope to rise by more than inflation over the medium to long term.
Peter Stephens owns shares of AstraZeneca and SSE. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.