Why You Shouldn’t Snub The Low Yields At Prudential plc, Reckitt Benckiser Group Plc & Smith & Nephew plc

These are crazy times for dividend yields, with an astonishing 20 stocks on the FTSE 100 offering returns of around 5% or more. Some of these yields are set to fall while others are in the drop zone, but the cumulative impact could make some investors feel a bit snotty about companies offering much less.

The following three companies all yield less than 3% but investors really shouldn’t think any less of them for that.

Prudential not a bad investment

I didn’t buy Asia-focused insurer Prudential (LSE: PRU) for the yield when I added it to my portfolio several years ago. The yield was low then, and it remains low today, at 2.75%. That doesn’t make it a bad investment. Dividend policy has been progressive, but the share price has more than kept pace. Despite recent slippage, Prudential is still up 86% over the past five years.

Its 2015 results, published today, show Prudential shrugging off an uncertain economic backdrop to deliver a 22% rise in full-year operating profit and a 20% increase in new business profit at constant exchange rates. Investors have been rewarded with a special dividend of 10p per share, plus a 5% increase to the full-year ordinary dividend. Who’s complaining about that low yield now? 

I could grumble about the recent share price setback, down 20% in the past year, but new investors could see that as a buying opportunity with Prudential trading at 13.3 times earnings. Not a bad price given its strong balance sheet, high quality recurring income, and growth prospects once Asia recovers.

Reckitt Benckiser delivers five-year share price surge

Household goods giant Reckitt Benckiser (LSE: RB) is one of my favourite stocks for some years but nobody’s perfect and the yield disappoints at 2.13%. Gosh, you could almost get that much from a savings account. What you won’t get from a savings account is the 115% share price surge that Reckitt has delivered in the past five years. 

2015 was another “excellent year”, with both sales and margins growing, despite a supposedly tougher economic environment. Reckitt’s 19 Powerbrands such as Clearasil, Harpic, Nurofen, Strepsils and Vanish retail in almost 200 countries, make up around 80% of its sales and generate the fattest margins. I am not the only admirer here as the stock currently trades at a whopping 24.66 times earnings. But I cannot remember the last time it was cheap, and sometimes it is worth paying a premium price. Reckitt’s low yield is a sign of success, in a way that Anglo American’s double-digit yield wasn’t.

Smith & Nephew’s recent stock performance volatile

Medical appliances maker Smith & Nephew (LSE: SN) is another long-term fixture in my portfolio and once again, I didn’t buy it for the yield. Which is a good thing, since it currently pays just 1.81%. What I have also got is a 65% share price growth over five years, although recent performance has been more volatile.

Underlying 2015 revenue rose a solid 4%, although it dropped 8% after currency swings, while adjusted earnings per share rose 2%. Currency will continue to be a drag this year, while emerging market sales have slowed, with the Chinese slowdown causing problems. Smith & Nephew’s strong balance sheet and healthy cash flows make it a decent way to play the world’s ageing demographics, although at 19.06 times earnings it looks more like a hold than a buy right now.

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Harvey Jones holds shares in Prudential and Smith & Nephew. He has no position in any other shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.