If you adopt the Foolish philosophy of investing in quality companies for the long term, there’s something you should know. A substantial proportion of returns over time are the result of reinvested dividends compounded, not capital gains.
While this is a huge incentive to put any money you receive back into the market, dividend investing clearly only works if that cash actually gets to the pockets of investors in the first place. That’s why it’s vital to check the extent to which proposed payouts are covered by profits rather than just their size.
With this in mind, here are my top picks from the market’s top tier for 2019.
Safe and sound
From an income perspective, I’ve been a fan of Legal & General (LSE: LGEN) for some time now. The £13bn-cap insurer and investment manager is a great source of reliable dividends. That’s thanks to its geographical diversification and the fact that people will always be looking for professional money managers to assist them in securing a comfortable, hassle-free retirement.
Of course, no stock is completely immune from market fragility and Legal & General — like many of its index peers — has taken a knock over the second half of 2018.
Naturally, we can’t say with any certainty what 2019 will be like for equities as a whole, and further market turbulence is always a possibility. With shares changing hands for just 7 times earnings, and a forecast yield of 7.8% covered a decent 1.8 times however, I continue to think that it warrants serious consideration from dividend hunters.
Its connection with the less pleasant side of human nature means that defence giant BAE Systems (LSE: BA) won’t be every investor’s cup of tea. Like its aforementioned FTSE 100 peer however, I continue to regard the company as a great income generator, particularly as dividends are consistently hiked every year (albeit not by all that much). At the current share price, BAE is forecast to yield 5.1% next year, covered twice by profits.
With geopolitical uncertainty likely to continue in 2019 (which may cause a further rise in defence budgets), I think the £15bn-cap could be a strong hold for those who wish to remain invested rather than miss out on any rebound in the equity markets.
And for just 10 times expected earnings following the recent market-wide sell-off, this really does look a great opportunity to buy the stock on the cheap.
Given that the manner of our exit from the EU is still to be confirmed, my last pick is one that might not appeal to many Foolish investors. The airline industry is notoriously cyclical and exposed to many threats that a lot of businesses don’t need to contemplate — the recent drone saga at Gatwick airport being a perfect example.
Nevertheless, I remain positive on the long-term outlook for British Airways owner International Consolidated Airlines (LSE: IAG).
Offering ‘only’ 4.7% for the next financial year, IAG is the least generous of my trio of FTSE 100 income picks (but still over three times more what the best cash ISA will return in interest).
That said, the extent to which this payout is likely to be covered by profits is the highest (3.6 times), suggesting that anyone holding the stock should have no difficulty sleeping soundly.
IAG is also the cheapest stock — yours for a bargain basement six times projected earnings.
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Paul Summers has no position in any of the shares 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.