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Why GlaxoSmithKline plc, BAE Systems plc And WPP PLC ORD 10P Are At The Top Of My Buy List

Over the last six months, shares in GlaxoSmithKline (LSE: GSK), BAE Systems (LSE: BA) and WPP (LSE: WPP) have fallen by around 15%.

Apart from commodity stocks, these three firms are the biggest fallers in my income portfolio. As a result, they’ve shot to the top of my buy list!

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Why?

My view is that if you’re investing for big-cap income, it rarely makes sense to sell shares.

After all, the value of your shares matters much less than the dividend income and yield they provide. A falling share price often means a higher yield is available to buy.

Over the long term, my experience suggests that buying on the dips can provide an above-average portfolio dividend yield.

GlaxoSmithKline

Glaxo shares are down from a 52-week high of 1,645p to about 1,320p. What that means to me is that the shares’ prospective yield for 2015 has risen from 5.6% to 7.0%.

Although yields of more than 6% are often considered risky, Glaxo’s 7.0% forecast yield includes a one-off special dividend relating to this year’s Novartis asset swap deal.

In 2016, the total dividend is expected to fall by 10p to 81.9p per share, giving a prospective yield of 6.2%. This payout should just about be covered by forecast earnings per share of 84.5p.

Although this level of dividend cover is lower than I’d like to see, Glaxo’s earnings are expected to recover over the next few years, and I suspect that the firm will be able to afford to maintain its payout in the meantime.

In my view, Glaxo remains a very attractive long-term buy.

BAE Systems

Defence giant BAE is facing some short-term headwinds. Chief among them is that an order for more Typhoon jets from Saudi Arabia hasn’t yet materialised, threatening the future of the firm’s UK production line.

The shares have fallen by 20% from a 52-week high of 549p. Yet these problems aren’t terminal. Orders from the Middle East often take longer than expected to complete.

In the meantime BAE has an order backlog of £37.3bn. First-half operating profits were £700m, giving a healthy 8.3% operating margin.

This year’s forecast dividend of 20.9p should be covered 1.8 times by expected earnings of 37.9p per share. The firm’s falling share price means that the prospective yield from this payout has risen from 3.8% to 4.7%.

I plan to buy more.

WPP

Profits at global advertising firm WPP have grown by an average of nearly 20% per year since 2009.

Earnings per share growth is expected to slow this year, to just 3%. However, dividend cover remains above 2, giving me confidence in the 14.8% dividend hike expected by City analysts.

WPP shares hit an all-time high of 1,616p earlier this year. They’ve since fallen by 17% to 1,335p. Should investors be concerned by this weakness, especially given WPP’s exposure to China and the Asian market?

I don’t think so. WPP is a global leader with a strong balance sheet.

There’s also plenty to look forward to in 2016. The Rio Olympics, US presidential election and Euro 2016 football are all likely to provide WPP with a share of the additional advertising spend generated by these events.

On a prospective yield of 3.3%, I rate WPP as an attractive long-term income buy.

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Roland Head owns shares of GlaxoSmithKline, WPP and BAE Systems. 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.