As US 10-year treasury bill yields hit historic lows, governments from Japan to Germany and Switzerland experiment with negative yields on bonds, and REITs face uncertain times post-Brexit, where are income investors to look for solid yields? While equities are always riskier than major government bonds, there are a handful of globally diversified defensive giants that offer great dividends and are relatively immune from the worst market volatility.
Perhaps the arch example of this is British American Tobacco (LSE: BATS). The addictive nature of its products means revenue remains remarkably stable even during the worst economic downturns, allowing the company to pay a hefty dividend that currently yields 3.1% based on last year’s payouts. Resilient sales numbers have long made cigarette companies darlings in the City and the past month has been no exception as shares of BATS rocketed 18% amid a general flight to quality.
Judging by its resilient volume growth, investors needn’t worry that cigarette companies will be going the way of the dodo any time soon. Q1 organic volume growth was a solid 2.4% as growing middle classes across the developing world clamour for more expensive and higher status symbol international brands. Solid dividends, global diversification and astonishing 34% operating margins should make BATS any income investors’ dream for years to come.
Selling soap, tea and nearly every other household product you could want is why Unilever (LSE: ULVR) is considered one of the best defensive shares to be found on the LSE. Like BATS, Unilever’s reliable revenue and global reach led to shares jumping 17% in the past month as investors of all types fled to Brexit-proof stocks. This jump has caused dividend yields to slump to 2.5%, but analysts are still expecting payouts to return to their traditional 3% level by next year.
If the 4.7% underlying year-on-year sales growth recorded in Q1 results can be replicated throughout the rest of the year, there’s little reason to believe analysts will be wrong. Unilever’s long-term growth prospects are also quite bright as its exposure to emerging markets, where it now gets over half of sales, means it’s set to benefit from growing consumer spending power across the world in the coming decades. Stable revenue in developed markets, high growth prospects in emerging markets and safe dividends make Unilever far more appealing to me than rock bottom interest rates on government debt.
Growth and reliability
One of the only shares out there that beats BATS or Unilever in stability is utility National Grid (LSE: NG). High regulation and reliable demand for gas and electricity allow National Grid to pay out a dividend that currently yields a whopping 3.9%. The regulated nature of utilities means National Grid isn’t lacking considerable growth prospects either. The company is moving forward with plans to sell its UK gas distribution business and plough the potential £11bn in proceeds back into higher-return assets.
One of the largest growth opportunities is the US, where National Grid’s operations are confined to just a few Northeastern states but still provided 30% of group operating profits last year. If National Grid can slowly expand offerings in the US alongside its stable business in the UK, the company’s great dividend and reliability put it well ahead of low-yielding bonds in my book.
Ian Pierce 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.