Every investor loves dividends. They’re the bread and butter of investing. Studies have shown that if you’re not investing with dividends in mind, you stand no chance of matching the market’s returns as around 50% of these come from reinvested dividends.
That’s why I’m always hunting out the best dividend stocks and trying to avoid the worst, those dividend stocks that are clearly pursuing an unsustainable dividend policy.
Two top dividend picks
BP (LSE: BP) and GlaxoSmithKline (LSE: GSK) are two dividend champions that look extremely attractive right now. Shares in these two companies both offer a dividend yield of 5% or more, and as we head into 2017, the outlook for both companies is improving.
This time last year, the price of Brent crude oil was around $41 a barrel. Today, the price is more than 25% higher at $54 a barrel, which is great news for BP. Over the past year, the company has been cutting costs to deal with the low oil price environment, and over the next 12 months, these actions should begin to pay off.
Indeed, during 2017 City analysts expect the company’s earnings per share to grow by 153% and further earnings per share growth of 19% is pencilled-in for 2018. Based on these figures, the shares are trading at a 2017 forward P/E of 14.9 and support a dividend yield of 6.6%.
Like BP, analysts are predicting strong earnings per share growth for Glaxo during 2017. Growth of 11% is pencilled-in for the year taking earnings to 112p, the highest level since 2012. Based on these estimates the shares are trading at a forward P/E of 14 and support a dividend yield of 5.2%. By 2017, Glaxo’s dividend payout will be covered 1.5 times by earnings per share.
One stock to avoid
In comparison to Glaxo and BP, EasyJet (LSE: EZJ) looks to me to be a company to avoid during 2017. EasyJet’s advantage over its peers used to be the carrier’s low-cost model. However, over the past few years, this economic benefit has disappeared.
As a result, City analysts are predicting a 28% decline in earnings per share for the fiscal year to 30 September 2017. These declines follow a 22% fall in earnings per share for 2016. For the year ending 30 September 2017, City analysts expect EasyJet report a pre-tax profit of £385m and earnings per share of 78p. For some comparison, two years ago EasyJet reported a record pre-tax profit of £686m and earnings per share of 139p.
Even though the company’s dividend yield of 5.7%, is covered twice by earnings per share at present, this payout could come under pressure if earnings continue to decline. Shares in EasyJet currently trade at a forward P/E of 12.2, which looks appropriate considering the group’s rapidly declining profits. All in all, considering EasyJet’s flagging growth it may be best to avoid the company for the time being.
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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.