Dividends are likely to prove popular over the coming years as interest rates fall to new lows. Real estate investment trust (REIT) Capital & Regional (LSE: CAL) may therefore gain favour with investors due to its upbeat income potential. Its first half results (released today) provide clues as to whether it offers greater dividend potential than two of the highest yielding shares in the FTSE 100, HSBC (LSE: HSBA) and Berkeley Group (LSE: BKG).
Capital & Regional’s operating profit increased by 16% in the first half of the year and this allowed it to increase dividends by 8%. This puts it on a yield of 5.8%, which is 230 basis points higher than the yield of the FTSE 100.
However, Capital & Regional’s dividend isn’t well-covered by profit. For example, in the current year it’s expected to be covered just 1.1 times by profit, which doesn’t provide a generous amount of headroom. This indicates that while dividend increases could happen in future, they’re unlikely to outpace profit growth.
On the topic of profit growth, Capital & Regional has seen no sign of challenges since the EU referendum. While this could continue and the UK property market may deliver strong results over the coming years, there’s a risk that a slowdown will ensue. Certainly, the Bank of England has taken this view. It expects the UK economy to grow by just 0.8% next year, which could hurt revenues for property companies.
Furthermore, the Bank of England predicts that UK house prices will fall. This is bad news for housebuilder Berkeley Group. It’s now expected to grow its bottom line by just 1% next year and it would be unsurprising for this figure to come under pressure. Even with sterling being weaker, Berkeley may find that demand for its prime properties falls as the UK endures what’s set to be the most difficult economic period since the credit crunch.
Still, Berkeley’s yield of 39% over the next five years has huge appeal. It works out as an annualised yield of 6.8% and is based around a commitment by management to pay £10 in dividends to shareholders between now and 2021. With Berkeley generating earnings per share of around £3.90 per annum, it seems to be very well covered. As such, Berkeley holds greater appeal than Capital & Regional.
Future growth expected
However, HSBC has the most income potential of the three companies. It yields 7% and while dividends are covered just 1.15 times by profit, HSBC’s bottom line is expected to rise by 6% next year.
Beyond that, HSBC has stunning growth potential due largely to its exposure to the Asian economy. Financial product penetration is low across China and much of Asia which, when combined with the increasing wealth of the middle class, means that HSBC is well-placed to capitalise on a major growth opportunity.
Furthermore, HSBC has greater geographic diversity than Berkeley and Capital & Regional and this lowers its risk profile. It may be hurt by Brexit, but it won’t cause its bottom line to slump. As such, HSBC offers the highest yield of the three stocks, but it’s its dividend sustainability that makes it the best income buy.
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Peter Stephens owns shares of Berkeley Group Holdings and HSBC Holdings. The Motley Fool UK has recommended Berkeley Group Holdings and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.