A dividend cut is an income investor’s worst nightmare, especially if you’re living off the income. Unfortunately, most of the time, dividend payouts are cut without much warning, and it’s not possible to accurately predict every dividend cut before it happens,
That said, you can try to reduce the risk of being caught by surprise.
Every month, analysts at investment bank Société Générale put out a list of companies that they believe have some of the most secure dividend payouts in developed equity markets.
The bank’s analysts screen the market for companies that have a dividend yield of more than 4%, have a strong return on capital and robust balance sheet. All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen.
This month there were only seven UK companies that made it into the top 40 qualifying companies. Here are four of the UK’s top seven dividend stocks according to Société Générale.
Pass the test
NEXT (LSE: NXT) is one of Société Générale’s top income stocks due to its return on capital of 59% and strong balance sheet.
What’s more, the company is focused on returning cash to investors. Next year, analysts believe that the company’s shares will support a dividend yield of 5% as regular dividends are set to be complemented by special payouts. The company has also been buying back stock this month after the market punished its shares following a lacklustre Christmas trading update.
Over the past six years, NEXT’s dividend payout has risen at a rate of around 18% per annum.
After recovering from the 2009 crisis, Persimmon (LSE: PSN) now has all the qualities of a top income stock.
Persimmon is set to support a dividend yield of 5.4% next year, and the payout is set to be covered 1.7 times by earnings per share.
At the end of June 2015, the company had just under £280m of cash with no debt, giving it enough capital to maintain its current dividend payout for two years if business dries up. City analysts expect Persimmon’s earnings per share to expand 28% this year, and the company trades at a forward P/E of 12.3.
Security in demand
G4S (LSE: GFS) may not be everyone’s cup of tea but according to Société Générale, the company has all the hallmarks of a top income stock. G4S’s shares support a dividend yield of 4.2%, and the payout is covered 1.5 times by earnings per share. City analysts expect the company to report EPS growth of 14% this year and a further 10% in 2016.
G4S currently trades at a forward P/E of 15.8.
Lastly, British American Tobacco (LSE: BATS) is a favourite of income funds around the world. British American’s shares currently support a dividend yield of 4.1%, and the payout is covered 1.4 times by EPS.
Société Générale notes that British American’s dividend payout has, on average, increased by 10% per annum since 2009, the group’s return on equity is above 50%, and the company’s capital spending as a percentage of cash flow is low. The majority of British American’s profit is returned to investors via both buybacks and dividends.
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Rupert Hargreaves 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.