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What This Top Dividend Trust Is Holding Now: Royal Dutch Shell Plc, British American Tobacco plc And Imperial Tobacco Group PLC

Top dividend trust JP Morgan Claverhouse IT (LSE: JCH) has delivered 42 consecutive years of dividend increases. Picking great dividend shares has helped the Trust outperform the FTSE All-Share Index over the past three, five and 10 years.

Claverhouse’s current top holdings are Royal Dutch Shell (LSE: RDSB), British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT).  Why might that be?

A white hot yield from black gold

Shell has a proud history of never having cut its dividend since the end of the Second World War. However, the current low oil price has raised concerns about whether the FTSE 100 giant will be able to maintain that record.

Last month, Shell reported a hefty third-quarter loss of $7.4bn. However, cash flow remained strong. Indeed, despite the oil price having averaged $60 per barrel over the past 12 months, Shell’s operating cash flow has covered both investment and dividends.

At a management day earlier this week, Shell told shareholders that the company’s £47bn acquisition of BG Group is progressing towards completion, adding that the boost to free cash flow from the combined group “enhances Shell’s dividend potential in any expected oil price environment”. Management also reiterated its intention to pay a maintained $1.88 per share dividend in 2015, and “at least” $1.88 per share in 2016.

While the immediate prospect is for little or no growth in the payout, the compensation is a massive 7.1% yield at a current share price of 1,725p.

Smokin’ dividends

The Claverhouse Trust has both of the Footsie’s tobacco companies in its top three holdings. Due to the nature of the products, this mature industry is notable for its earnings visibility and cash generating capacity. The combination of stability and reliable dividends is highly prized by pragmatic investors.

However, it’s not all plain sailing for tobacco companies at the present time. In a trading update last week, British American Tobacco (BAT) said: “The trading environment remains challenging due to the slower than expected recovery in the global economy, continued pressure on consumer disposable income worldwide and significant currency headwinds”.

For the first nine months of the year, BAT reported a 4.2% rise in revenue at constant exchange rates, but a 6.5% decline at actual rates. Similarly, Imperial Tobacco, which has a 30 September financial year end, reported in its annual results this week that revenue was up 4% at constant exchange rates, but down 3% at actual rates.

While currency movements are having an adverse effect at the present time, exchange rates do ebb and flow, sometimes creating a headwind and sometimes a tailwind. Despite the current unhelpful impact on revenue, earnings are being protected by cost cutting and efficiencies. Imperial reported a 4.5% rise in earnings per share (EPS) for the year to 30 September, and this is forecast to accelerate to 10% in the coming year. Meanwhile, analysts expect flat EPS from BAT for the current year to 30 December, with growth resuming at 7% in 2016.

Both companies’ dividends are comfortably covered by earnings. Imperial’s trailing yield is 4%, at a current share price of 3,510p, while BAT has a similar 3.9%, at a price of 3,870p. These yields may not be the highest in the market, but they are among the safest around and should grow steadily over time.

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G A Chester 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.