While much of the talk of late has centred on interest rate rises and when exactly they will occur, dividends are set to remain en vogue over the medium term. That’s because, while interest rates may quadruple between now and 2020, that would still leave them on just 2% which, by historical standards, is still rather low. And, while inflation is near-zero, it is unlikely to remain so low in 2016 and beyond. Therefore, obtaining a real-terms yield, via shares, is set to remain a sound option for investors and keep high yield stocks performing relatively well.
One top dividend stock for the medium to long term is support services company, Interserve (LSE: IRV). Its shares fell by over 4% this week following the release of its half year results. While pretax profit increased by 19% versus the comparable period from 2014, the company highlighted the challenges that are set to take place as a result of the introduction of the Living Wage. This will impact on Interserve’s margins and cause profit to be hit by around £10m to £15m in the next financial year.
However, Interserve’s confidence in its future performance was demonstrated by an increase in its interim dividend of over 5% and, following its aforementioned share price fall, it now yields an impressive 4.1%. And, with its bottom line set to rise by 7% in the current year and by a further 9% next year, there is plenty of scope for dividend rises over the medium term. That’s especially the case since Interserve has a rather modest payout ratio of 39%, which indicates that dividend rises could outstrip earnings growth and still leave the company in sound financial shape.
Meanwhile, other FTSE 350 stocks also have excellent yield prospects. The likes of Centrica (LSE: CNA) and BAE (LSE: BA), for example, may have endured challenging recent trading conditions, but both remain top payers when it comes to dividends.
In Centrica’s case, it still yields a very impressive 4.5% despite rebasing its dividend some months ago. Looking ahead, Centrica is likely to endure a challenging short term that could include further weak investor sentiment as a result of a low oil price, while its refreshed strategy will take time to have a positive impact. However, cutting its dividend was a sound move as it leaves the company in a stronger financial position and, in the long run, the changes being made by its new management team are likely to mean improving profitability and a higher dividend growth rate, too.
Although shares in BAE have risen by 10% in the last year, the defence company still yields a very enticing 4.5%. Furthermore, with spending on defence items across the developed world set to increase as the global economy continues to pick up, BAE is forecast to increase dividends over the medium term. In fact, in the current year they are due to be 1.5% higher and next year growth of 3.1% is being pencilled in. Because of this, BAE should deliver a real terms increase in income for its investors and, with its shares trading on a price to earnings (P/E) ratio of just 12.1, capital gains could also be excellent over the medium to long term.
