My 3 favourite FTSE 100 5% yielders

Rupert Hargreaves shares his three favourite FTSE 100 (INDEXFTSE: UKX) income stocks and he thinks they have growth potential.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It is no secret that dividends are one of the best parts of investing. Not only do they give you a regular stream of income, which should grow steadily over time, but numerous studies have shown that they provide the bulk of returns for investors over the long term.

With this being the case, my portfolio is stuffed full of blue-chip dividend stocks, to make the most of dividends’ wealth-creating qualities. Here are my top three FTSE 100 dividend plays. 

Be greedy when others are fearful

My first is tobacco group Imperial Brands (LSE: IMB). Over the past 12 months, shares in this business have fallen out of favour with investors, and it is easy to see why. Tobacco sales are falling around the world and governments are only stepping up their efforts to stamp out smoking. Meanwhile, attempts to diversify into the so-called reduced risk market have not proved to be as profitable as initially expected. 

Shares in the company also took a knock when Japan Tobacco, which has long been touted as a possible buyer for Imperial, confirmed that it was not interested in bidding for the UK-based company anytime soon.

Still, despite all the issues surrounding the company, Imperial’s outlook is not as bad as its depressed valuation seems to suggest. After recent declines, shares in the tobacco company are trading at a forward P/E of 9.8.

At the beginning of May, the company reported first-half results that beat expectations, thanks to higher cigarette prices in the US, and confirmed City guidance for the full year. Excluding the impact of one-off items, earnings per share are expected to rise 44% to 263p for 2018.

To help reinforce the group’s financial position, management is also planning to raise £2bn through the sale of non-core businesses during the next 12 to 24 months, which should help alleviate concerns about the state of Imperial’s balance sheet.

With profits growing and asset sales planned, I see no reason why Imperial’s dividend payout will come under pressure in the near future. The distribution of 188p per share is covered 1.4 times by earnings and is equivalent to a dividend yield of 7.6% current prices.

A return to growth 

Another blue-chip dividend stock that has recently fallen out of favour with investors is GlaxoSmithKline (LSE: GSK).

The City dumped shares in the pharmaceutical group last year following comments from the new CEO Emma Walmsley that it “would be irresponsible” to maintain the dividend yield at the current level at the expense of investing in growth.

However, at the beginning of 2018, it became apparent that the group was more than comfortable with its current dividend distribution following an increase in revenues of 8% for 2017.

And since these figures were published, Glaxo’s outlook has only improved, which leads me to conclude that the dividend remains safe for the time being. Excluding the impact of exchange rate fluctuations, first-quarter sales grew 4% meanwhile, adjusted earnings per share jumped 11% in constant currency.

To help boost growth, Glaxo is currently in the process of a $13bn deal to buy the Novartis share of the two companies’ consumer joint venture, and Glaxo is refining its R&D operations. Walmsley wants to streamline the group and focus on core strengths, which has meant cutting some pipeline projects, but the additional funding should benefit other parts of the business.

One division of the group where Glaxo is seeing tremendous success is its ViiV HIV arm. Last week, ViiV published the results of a large clinical trial showing the effectiveness of its pioneering two-drug HIV treatment. 

This trial, code-named Gemini, could help Glaxo grab a much larger share of the $20bn per annum market for HIV treatments around the world. Analysts are already predicting that sales of the combination treatment could hit £1.1bn by 2025. One of the drugs, dolutegravir, is also expected to be a blockbuster treatment on its own with sales of £5.2bn expected by 2022.

These new treatments, coupled with management’s efforts to streamline the business and improve returns on investment, should help fund Glaxo’s dividend for many years to come. 

Shares in the company currently support a dividend yield of 5.4% and, they are not that expensive either, trading at a forward P/E of 14.3. The City has pencilled in earnings growth of 12% for 2018 as a whole.

Defying expectations 

My final blue-chip dividend pick is ITV (LSE: ITV). Over the past two years, shares in ITV have plunged 35% from an all-time high of just over 260p, primarily due to concerns about the company’s business model as advertising increasingly moves online, away from traditional markets such as television and print.

Advertising revenues have come under pressure, but the decline has been nowhere near as severe as some analysts were expecting. For 2017 as a whole, net advertising revenue declined 5% but rebounded 3% during the first quarter of 2018.

What’s more, ITV is no longer just a broadcaster. The company now generates revenue from multiple streams. Its online and production businesses are booming with revenues rising by 11% and 41% respectively from these divisions during the first quarter. Meanwhile, it has been reported that the group is looking to expand into the theme park market by building an attraction in central London based around its TV shows with the capacity for 300,000 visitors per year.

All of the above leads me to conclude that ITV is not the basket case some analysts believe it to be, and the shares look like a steal at current levels.

The stock is currently trading at a forward P/E of 11 and supports a dividend yield of 4.8%. The payout is covered twice by earnings per share, so there’s plenty of room for dividend growth in the years ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares in GlaxoSmithKline, Imperial Brands and ITV. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Imperial Brands and ITV. 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »