This is set to be a bumper year for UK dividend investors with British companies on course to pay out almost £100bn across 2018, up 4.8% on last year.
Power of 10
It follows a record third quarter of £32.3bn, according to the latest UK Dividend Monitor from Link Asset Services. Large blue-chips are leading the charge, notably the banks and mining companies, with retail proving a drag.
Falling share prices and rising dividends have driven equity yields to a whopping 4.1%, but two FTSE 100 stocks are on course to yield more than 10%, according to separate research from AJ Bell. It puts the country’s biggest housebuilder Persimmon (LSE: PSN) on a forecast yield of 10.2%, covered 1.17 times by earnings, and says Evraz (LSE: EVR) is forecast to yield exactly 10%, with cover of 1.22.
Help to yield
A high yield does not automatically mean riches but is often a sign of a company in trouble. Persimmon’s share price is down 23% over the past 12 months, amid fears that the housing market is vulnerable to Brexit angst, rising interest rates and the curtailment of the Government-backed Help to Buy scheme, which supports almost half of its purchasers. Reports currently suggest that it could be extended from 2021 to 2023, though.
The property market is still growing and the severe housing shortage should sustain demand, although affordability is a growing threat. However, with a forward valuation of 7.8 times earnings, some of the worry is in Persimmon’s price, and City analysts reckon the dividend is safe, pricing in a 10.9% yield for 2019.
Cash is King
Persimmon also has plenty of cash, with a net cash balance of £1.3bn at 31 December, up from £913m one year earlier. That dipped slightly to £1.16bn on 30 June, but this remains healthy. With earnings per share (EPS) forecast to rise 7% this year and 3% in 2019, that stonking 10%+ yield looks solid enough and Rupert Hargreaves reckons it could even hit 26%.
In March I said FTSE 100 listed Russian coal and steel miner Evraz (LON: EVR) looked red hot and it isn’t hard to see why, with the stock up 478% over three years and 57% growth over the past 12 months. However, there have been signs of a slowdown lately with its share dipping 6% in three months, in line with the FTSE 100’s wider decline.
Debt down
Evraz boasted a strong first half, with consolidated EBITDA up 65.5% to $1.9bn and margins jumping from 22.6% to 30% due to higher vanadium, coal and steel prices, as well as cost-cutting initiatives. Net profit of $1.15bn spiralled from just $86m in H1 2017, although this bumper earnings growth is likely to be a one-off. EPS growth of 152% in 2018 is expected to reverse next year, with City analysts predicting a 27% drop in 2019. They also reckon the yield will drop to a ‘mere’ 8.4%, which is hardly calamitous.
Strong free cash flow of $661m in the first half should help ensure the dividend’s sustainability, while Evraz continued to work down its net debt, from $4.8bn to $4bn. Both these double-digit dividend income heroes have risks, but also bring plenty of potential rewards.
