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My top 3 dividend stocks yielding more than 5%

STV (LSE: STVG) is one of my top dividend stocks for 2018 because the firm has all the hallmarks of a top income investment. 

For a start, STV’s dividend yield is currently just under 6%, around 2.9% higher than the rest of the market. After several years without a dividend, STV only returned to the ranks of the dividend universe in 2014. Previously, debt repayment had taken priority, but now it looks as if the firm is back on a stable footing.

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Debt paydown

At the end of the first half of 2017, net debt had fallen to £34m, around 1.5 times earnings before interest, tax, depreciation and amortisation for the full year. 

Management is now putting an emphasis on shareholder returns. The group announced a 25% increase in its interim dividend at the half year and also went on to reveal a £2m share buyback. For full-year 2017, the proposed distribution is up 13% year-on-year. Going forward management is looking to return around 60% to 80% of the firm’s cash generation after pension deficit funding payments. This implies that STV’s beefy shareholder returns are set to continue for the foreseeable future.

Cash cow 

Retailer Halfords (LSE: HFD) is my second top dividend pick for 2018. Trading at a forward P/E of 11.7 with a dividend yield of 5.2%, the company offers both value and growth.

However, the market is becoming increasingly concerned about the firm’s outlook in today’s hostile retail environment. Over the past five years, pre-tax profit has stagnated as Halfords has tried to stave off the rise of online retailers by discounting and investing more in its store offering. This investment has slashed its operating profit margin from 11.5% to 6.7% for 2017. 

Still, the company continues to throw off cash, and even though margins are under pressure, it does not look as if the dividend is under threat. For the fiscal year to 31 March 2017, Halfords generated cash from operations of £72m compared to a total dividend distribution of £54m. What’s more, the group has a strong balance sheet. Net debt was only £86m at the end of fiscal 2017, 1.2 times annual operating cash flow and a net gearing ratio of 21%. 

With a strong balance sheet behind it and a robust cash flow, City analysts are expecting the dividend to increase by around 3% to 4% over the next few years. 

Retail problems 

My third and final dividend pick for 2018 is Hammerson (LSE: HMSO). Investors have turned their backs on Hammerson recently as it tries to merge with peer Intu. When combined, these two firms will become one of the UK’s biggest property companies with leading shopping centres including London’s Brent Cross, the Birmingham Bullring and Manchester’s Trafford Centre owned by a single company. 

At a time when online shopping is growing rapidly, at the expense of physical retail, investors are questioning the deal’s rationality, although in many ways it does make sense. It’s part of a global consolidation trend and a more substantial firm will be able to generate fatter profit margins thanks to operating synergies while offering better terms to prospective tenants than two smaller groups with less buying power. And analysis also shows it’s the ‘supermalls’ that the combined business will operate that are attracting the best tenants and the most footfall.

I’m positive on the outlook for the enlarged group and think its current 5.5% dividend looks too good to pass up. 

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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