Two 5% dividend yields you’d be crazy to pass up

Finding the market’s most reliable dividend stocks can seem like a daunting prospect at first, I mean, where do you start?

But dividend investing doesn’t have to be that complex. While there more to finding the best dividend than just choosing the highest yield on offer, often the best dividend stocks tend to be boring and predictable.

A top dividend pick

Royal Dutch Shell (LSE: RDSB)  is a great example. The oil major is one of the UK’s most prominent dividend paying stocks. The firm’s dividend amounts to a significant percentage of the total  payout from the UK market every year. 

Shell has earned its status as a dividend champion with more than five decades of payout history behind it. The company hasn’t cut its payout since the end of the Second World War. This accomplishment is all the more impressive considering it operates in a cyclical industry. Being able to maintain the payout at a steady level through the ups and downs of the oil market is a testament to the skill of the company’s various managements over the years. 

Even during the recent oil price bust, Shell has prioritised its investors, slashing costs across the business to ensure there’s no need to curb shareholder returns. After these actions, this year the company’s dividend payout is expected to be wholly covered by earnings per share, great news for long-term dividend investors. 

At the time of writing, shares in Shell support a yield of 6.3% and trade at a forward earnings multiple of 15.4.

Defensive income 

GlaxoSmithKline (LSE: GSK) is another under the radar UK champion. Thanks to the company’s highly defensive nature, its earnings are relatively predictable, which means management has plenty of clarity whether or not the company will be able to afford its dividend payout.

During the past three years, there has been some concern about the sustainability of the company’s payout. Although management guaranteed the dividend at 80p per share, when Glaxo’s earnings per share dipped below this critical level, City analysts began to worry about the sustainability of the payout. Now it seems such concerns are behind it. 

City analysts expect Glaxo’s earnings per share to grow by staggering 33% to 101p this year, easily covering the group’s payout of 80p per share, which translates into a yield of 5.1% at current prices. What’s more, next year city analysts have pencilled-in earnings per share growth of 10% and a further 4% earnings growth is expected for 2018. 

All in all, by 2018 Glaxo’s dividend payout will be covered 1.5 times by earnings per share allaying any concerns about the sustainability of the yield. As the demand for healthcare products around the world continues to grow steadily, Glaxo’s earnings should also continue to expand, keeping the payout safe for the long term.

The bottom line 

Overall, Shell and Glaxo may be boring companies, but they’re two of the UK’s top dividend stocks both of which currently offer a yield of more than 5%.

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Rupert Hargreaves owns shares of GlaxoSmithKline and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.