When it comes to building long-term wealth from the stock market, dividends play an important role. Indeed, according to figures from Bloomberg, for the 10-year period to the end of 2016, the FTSE 100 index returned just 15% in capital appreciation terms, but a total return of 67% when reinvested dividends were included in the calculation. In other words, dividends provided the bulk of the returns. With that in mind, today I’m looking at two FTSE 100 stocks that are forecast to pay dividends of 5% or higher this year.
Enduring a poor run
National Grid (LSE: NG) shares have endured a poor run since late May, falling from just below 1,100p to 930p today. When a company’s share price declines, it’s dividend yield rises and the fall in National Grid’s share price has pushed its dividend yield up significantly. Indeed, with City analysts predicting the utility giant to pay out 47.2p per share in dividends for FY2018, the prospective dividend yield is a high 5.1%. Does that make National Grid a good dividend stock?
To my mind, there’s both a bull case and bear case for owning National Grid for its dividends. On the bull side, the 5.1% dividend yield is fantastic and significantly greater than the FTSE 100’s 3.3% forward-looking yield. Furthermore, National Grid has an excellent record of steadily increasing its dividend payout, and has stated that it plans to increase the dividend in line with RPI inflation going forward. Operating in a ‘defensive’ sector, the stock should also hold up relatively well if global markets pull back.
On the bear side, National Grid is expected to record revenue growth of just 1.8% this year, and the company also has a fair chunk of debt on its balance sheet. If interest rates rise, that debt will obviously become more expensive to service, meaning that there may be less cash available for dividends.
Overall, however, I’m bullish on National Grid’s dividend prospects.
Struggling for growth
Also set to yield over 5% this year is Marks and Spencer Group (LSE: MKS). Analysts currently forecast a dividend payout of 18.7p per share, which equates to a high dividend yield of 5.4%.
However, if you’re thinking of buying the stock for its dividend, there’s things you should know.
Marks and Spencer has struggled to generate growth in recent years. While its food division is performing quite well, its clothing division continues to underperform. In the 1990s, M&S used to be the go-to high street destination for clothes in its hayday. However, the landscape has changed with high street rivals such as Zara and H&M, and online rivals such as ASOS stealing market share and squeezing margins. As a result, Marks has recorded total sales growth of just 3% over the last three years. Poor sales growth can have implications for a company’s ability to grow its dividend.
An analysis of Marks and Spencer’s dividend history reveals a rather poor track record. The company cut its dividend in 2009, and, since 2011, the dividend payout has been increased just 10%, from 17p to 18.7p per share. This year, no growth is forecast. With inflation running at around 2-3% per year, investors who rely on dividends for income are essentially losing purchasing power over time.
As a result, I’d be weary of buying Marks and Spencer for its dividend until the company demonstrates tangible signs of a turnaround.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.