Recent falls in the stock market have left behind some cracking dividend yields being paid by solid underlying businesses. With macroeconomic uncertainty in the air, and investors feeling nervous, conditions could be right for picking up bargain shares that could go on to deliver decent total returns for investors in the months and years to come.
You don’t even have to look very far down the listings to find firms with good potential. Some of the most attractive valuations reside in the FTSE 100 index of the UK’s largest public companies. Three big dividend payers that caught my eye are packaging and paper supplier Mondi (LSE: MNDI), telecoms giant BT Group (LSE: BT.A), and energy transmission and distribution firm National Grid (LSE: NG).
Steady ongoing trading
Mondi’s dividend yield is running close to 4%, and the firm has a decent record of growing its revenue, operating cash flow, and earnings to support a progressive dividend policy where the dividend rises a little each year. City analysts following the firm expect earnings to grow for at least the next two years, and the company said in a trading update as recently as October: “With our robust business model and culture of driving performance, we remain confident of continuing to deliver an industry-leading performance, and sustaining our track record of delivering value accretive growth.”
Trading at BT has been more challenging in recent years, but the firm has kept up its dividend payments and the yield is now around 6%. Looking forward, City analysts expect earnings to decline next year by about 13%, before flattening out. The firm said in November’s half-year report that despite competitive markets for fixed, mobile and networking, and ongoing declines in the firm’s legacy products, its strategy to simplify and strengthen the business is delivering improved efficiency.
Meanwhile, National Grid is known for its consistent cash inflows and a steady dividend that tends to rise a bit each year. However, regulation is fierce on both sides of the Atlantic where the firm operates, and there’s a risk that over-enthusiastic regulators could impair the company’s ability to keep its dividends rising. However, the current yield is around 6%, which looks attractive. But Ofgem’s latest proposals could end up reducing forward returns for investors. Nevertheless, times of uncertainty like these can be good for picking up shares at bargain prices, if you’re comfortable with the level of risk.
Uncertainty comes with high yields
I think, generally, leading your investment decisions by considering the size of a company’s dividend can be tricky, because big dividends usually mean a company is out of favour with investors for some reason. So, although shares might look like good value, you’ll often find that the outlook for the underlying business is a little murky. But well-known US investor Warren Buffett said “you pay a high price for a cheery consensus,” which suggests that low prices and high dividend yields come with uncertainty.
On balance, I think these three high-dividend companies are well worth your research time, and I’d aim to buy some of their shares and hold through 2019 and beyond.
