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Why I’d buy GlaxoSmithKline plc for its 5%+ dividend yield today

GlaxoSmithKline (LSE: GSK) shares have endured a rough three-month period, falling from above 1,700p to just 1,470p today, a decline of almost 15%. Given that the pharmaceutical stock is a popular pick among UK investors due to its high dividend yield, does the share price fall represent a buying opportunity?

5.4% dividend yield

While GlaxoSmithKline no doubt pays a chunky dividend, the stock is far from the perfect dividend stock, in my view. Sure, a trailing dividend yield of 5.4% looks attractive in the current low-interest-rate environment, but when we dig further into the dividend details, we can see that coverage in the last two years has been thin. Indeed, Glaxo generated core earnings per share of 75.7p in 2015 and 102.4p in 2016, resulting in dividend coverage of just 0.95 and 1.28 times over the last two years. A level below 1.5 is generally considered to be risky.

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Furthermore, the company hasn’t increased its dividend for three years now, paying 80p per share for 2014, 2015 and 2016. Tesco shareholders may recall the supermarket doing the same thing between FY2012-FY2014, before cutting its payout dramatically the next year. GlaxoSmithKline recently advised that dividend growth will be put on hold until free cash flow cover of the dividend is in the target range of 1.25 to 1.5 times.

Having said all that, I’m not ready to sell my GlaxoSmithKline shares just yet.

With the number of people aged 65 or older across the world set to double by 2050, demand for healthcare should remain robust. As a result, I’m bullish on the long-term prospects of the healthcare sector. While GlaxoSmithKline may be struggling a little now, I’m willing to give the pharmaceutical giant time to rebuild itself into a stronger, more balanced business.

Management stated in the July half-year report, that it “recognises the importance” of dividends, and that a payment of 80p can be expected this year and next, “subject to any material changes in the external environment or performance expectations.” City analysts anticipate dividend coverage improving this year, with the consensus earnings figure of 110.8p, giving a coverage ratio of a slightly more healthy 1.39.

So while dividend growth may be a while off, I believe GlaxoSmithKline’s yield still looks attractive in today’s low yield environment. On a forward P/E of 13.3 times, the stock offers long-term value, in my view.

A 6.3% dividend yield 

Turning to another high-yield dividend stock, River and Mercantile (LSE: RIV) released preliminary full-year results today, and it appears that the investment manager has strong momentum.

The company generated adjusted underlying profit before tax of £16.4m, up from £11.1m last year, and adjusted basic earnings per share rose to 22.9p, up from 11.62p last year. The board today declared a second interim dividend of 8.1p, of which 2.8p was a special dividend, as well as a final dividend of 6p, of which 2.8p was a special dividend. Adding these to the interim dividend of 5.6p the company declared in February, and the total FY2017 dividend payout was 19.7p, equating to a stunning dividend yield of 6.3% at the current share price.

River and Mercantile has enjoyed strong growth in assets under management over the last three years, and while there’s no guarantee the company will pay such strong dividends in the future, on a P/E ratio of 13.8, I believe this small-cap cash cow could be worth a closer look.

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Edward Sheldon owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.