Three Yields Set To Thrive In 2016: British American Tobacco plc, Legal & General Group Plc & Unilever plc

The last year has been tough for lovers of dividends with a host of big FTSE 100 names slashing their payouts, but it isn’t all bad news. Some dividends look solid, notably these three.

Still smokin’

British American Tobacco (LSE: BATS) may have suffered a 6.2% drop in reported revenues in 2015 but adverse foreign exchange movements were largely to blame, with revenues up 5.4% at constant exchange rates. Its dividend wasn’t troubled, up a healthy 4% to 154p. The share price also looks rosy, rising 7% over the last month and 63% over five years.

I am increasingly surprised when I encounter a smoker these days and there is no doubt that this is a dwindling market, although the decline is a slow burn. British American Tobacco’s group cigarette volume fell by 0.5% to 663bn, but that measures well against an estimated industry decline of 2.3%. Its successful ‘Global Drive Brands’ continue to boost revenue and profits, and management is still flying the flag for its e-cigarette brand, Vype.

Today’s 3.8% yield looks admirably modest compared with many on the index right now, and is nicely covered 1.4 times. With forecast earnings per share growth of 9% this year and 8% next, and British American Tobacco retains its attractively defensive flavour. But, trading at 19.2 times earnings, you pay a premium price for it.

Group therapy

Legal & General Group (LSE: LGEN) has been a top FTSE 100 performer for several years and even though it’s fallen 15% in the past 12 months, it still boasts 95% growth over the last five. As a specialist in low-cost and tracker investment products, it has been punished by the recent stock market meltdown, which made many investors question whether passive trackers are the right way to tackle today’s volatile markets.

As investors have rediscovered their mojo in recent weeks the stock has sprung to life, up 10% in the last month. L&G has also shrugged off Chancellor George Osborne’s pension freedom reforms, offsetting the subsequent collapse in individual annuity sales by ramping up sales of its bulk annuity contracts, including its first scheme in the US.

The stock currently yields 4.7% but this is forecast to hit 5.9% at the end of this year and 6.3% by December 2017. Currently, it is covered a handsome 1.5 times. Forecast EPS shows growth of 7% this year and 6% next, yet trading 14.2 times earnings it isn’t overpriced. Falling markets could still hurt, but Legal & General looks in command of its destiny.

Pull that lever

The more I have reviewed Unilever (LSE: ULVR), the more I have come to admire it. Despite the slowdown it continues to clean up in the emerging markets, where it now derives half its earnings, and has rewarded investors with steady share price growth year after year. It is up 6% over the last 12 months and 68% over five years.

Chief executive Paul Polman has warned of tougher market conditions ahead, but you would have to bet on Unilever pulling through, as it looks to cut costs and nudge through price increases where it can.

The dividend yield looks commendably solid at 3.9%, covered 1.4 times, and this is another stock with steady EPS potential, with forecast growth of 8% in 2016 and 7% the year after. The one thing likely to put you off is the sky-high current valuation of 23 times earnings. Unilever was momentarily cheap, but no more.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.