Currently, according to my figures, there are 24 stocks in the FTSE 100 that support a dividend yield of 5% or more. Of these, 10 yield more than 6%. The question is, are these income champions worth buying or should you stay away?
Legal & General (LSE: LGEN) might not be the most exciting business around, but with a dividend yield of 6.3%, it qualifies as an income champion.
It is unclear exactly why investors are not giving this company a higher valuation. The stock currently trades at a forward P/E of 8.5, a 35% discount to the rest of the market.
What’s more, the shares have hardly budged over the past three years, despite the fact that earnings per share (EPS) have jumped by nearly 50%. Analysts are expecting further growth for the next two years with EPS rising from 26.3p in 2017, to 31.1p by 2020. The dividend is expected to grow at a more sedate 14% in total over the same period.
I believe it is worth keeping an eye on his company. It seems as if the market has yet to realise the opportunity here, and the low valuation gives a wide margin of safety if anything goes wrong. With this being the case, Legal & General is a dividend bargain in my eyes.
Direct Line (LSE: DLG) seems to be another attractive dividend opportunity. Based on current City forecasts, shares in the company are trading at a forward P/E of just 10.5, and I’m struggling to find any reason why the market has placed such a low valuation on the business.
EPS are projected to fall slightly this year, thanks to insurance losses, but this is just part and parcel of operating in the insurance sector. This could be the reason behind the market’s ambivalence towards the company. The market does not like uncertainty and insurance can be a very uncertain business. For savvy investors, however, this could be a great opportunity.
As well as being an unpredictable business, insurance can also be a lucrative one. Direct Line is committed to returning almost all of its profits to investors, analysts believe the dividend yield will hit 8.5% this year, which is enough to convince me that this is another dividend bargain.
Slow and steady
Finally, National Grid (LSE: NG) is a company that I’m not so keen on.
Shares in this business have been on the back foot for some time because it seems to be under attack from all sides. The Labour Party is threatening to nationalise National Grid if it gets into power and regulators are taking a tougher line against utilities. Also, the company has a considerable level of debt (net gearing 127%), which is not ideal with interest rates going up.
All of these factors are undoubtedly weighing on investors’ minds. It doesn’t help that these shares are also trading at a premium valuation of 13.3 times forward earnings, making the company the most expensive in this piece. The dividend yield is also the lowest at just 6.1%.
To my mind, this valuation does not make up for the uncertainty surrounding the business. I think National Grid has all the hallmarks of a value trap.
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Rupert Hargreaves owns no 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.