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What Low Interest Rates Mean For Top Dividend Stocks British American Tobacco plc, Royal Mail PLC, (RMG) and Vodafone Group plc

The US Federal Reserve has decided it still isn’t safe to increase interest rates, leaving many investors wondering when it ever it will be safe.

This is yet more bad news for savers but serves to make top FTSE 100 dividend stocks look even more attractive than they already are. Stocks rather like these three.

British American Tobacco

If smoking is dying British American Tobacco (LSE: BATS) has clearly hit upon a successful survival strategy. Its share price is up more than 50% over the last five years, against less than 10% on the FTSE 100. Investors have long admired its income-paying prospects, but clearly, this has growth potential as well.

As Morgan Stanley recently pointed out, BATS has the most consistent growth profile in global tobacco, helped by its emerging market exposure, robust pricing and consistent margin expansion. Consumer-led next generation products portfolio such as Vypee-cigs and the Voke inhaler should help offset continuing decline in traditional tobacco product sales.

British American Tobacco has been hit by the emerging markets slowdown, and in the longer run I would expect health education campaigns to make inroads here as well. But the company is resilient, which it has shown lately by cutting costs and improving margins, and its 4.15% yield looks steady. At 17.14 times earnings it isn’t cheap, but that reflects the high esteem the market still holds this stock in.

Royal Mail

Right now, Royal Mail (LSE: RMG) delivers a respectable yield of 4.57%, or just over nine times base rate. The excitement and controversy surrounding its flotation belong firmly in the past, what matters to investors today are its future prospects. These are steady, rather than spectacular. It operates in one declining area, letters, while battling stiff competition in a growth area, parcels.

It has had more success in the former than the latter and now faces a serious challenge from Amazon’s delivery ambitions. The share price has slipped around 10% in recent months but it seems to have found the right pre-launch level, and at less than 11 times earnings the valuation isn’t very demanding. There are struggles ahead but this is the first time since the IPO that I am seriously tempted to buy Royal Mail. 

Vodafone

Vodafone (LSE: VOD) is a long-term income play that continues to ring up the dividends, with a current yield of 5.18%. Its consistency is impressive, given slowing sales in two of its key markets, recession hit Italy and Spain. If the European Central Bank’s QE blitz finally turns Europe around, Vodafone could be an early beneficiary.

Yet the failure of the recent merge with Liberty Global has brought out the critics, notably media analyst Neil Clamping at Aviate Global, who has just derided Vodafone as “a disparate network of mobile only offerings in multiple markets offering no competitive advantage, no scale opportunities, few synergies, no converged services and certainly no quad-play”.

That strikes me as a unduly damning verdict on a company that trades at 40 times earnings. With forecast EPS growth of 20% in the year to March 2017, and its impressive dividend track record, Vodafone still has plenty to offer income investors.

 

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Harvey Jones has no position in any shares mentioned. 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.