2020 is likely to be a difficult year for the global economy. With growth slowing and some major economies on the verge of recession, the export-oriented FTSE 100 may see its earning power diminish next year.
Even moderately lower corporate earnings could have a direct impact on dividends for many investors. The FTSE 100 currently offers a 4.4% dividend yield, which is both historically high and increasingly unsustainable.
Most of the top 10 dividend payers barely cover their annual dividends with profits or earnings. Some, like Vodafone, pay out more in dividends than they earn per share every year.
If corporate profits are squeezed next year, many of the top payers may have to sustain dividends with their cash hoard or announce cuts. However, some companies have plenty of dividend coverage and are less exposed to the market cycle.
Here are two robust dividend stocks I would consider for next year.
Insurance giant
Aviva’s (LSE: AV) share price has plummeted over the past few years, but now it seems like the valuation has been pushed too far. You can buy the shares for 6.9 times forward earnings, compared to 17 times forward earnings for the FTSE 100 as a whole.
Even as the share price plummeted over the past three years, the company’s underlying fundamentals improved. Profits have nearly doubled and dividend per share has jumped 44% since 2016.
The confluence of a falling share price with rising earnings has made Aviva one of the most robust dividend stocks on the FTSE 100 at the moment. Not only is the attractive 7.7% dividend yield much higher than the index average, but the annual payout is also covered by earnings 1.9 times over.
In other words, Aviva has plenty of earning power to sustain its dividend next year, and since the stock is already beaten down there’s not much downside risk left for shareholders to worry about, in my view.
Pharmaceuticals
Selling medicines and consumer staples is arguably a more recession-resistant business model than insurance. GlaxoSmithKline (LSE: GSK) stands out as a clear leader in this industry. Currently worth £86bn, this corporate giant is one of the most well-recognised British names in the world.
British investors, however, are more familiar with the company as an attractive dividend payer. The share currently offers a 5.6% forward dividend yield. GSK’s dividend coverage ratio (annual earnings divided by annual dividends) is 1.45. The company also has £4.4bn in cash and cash equivalents on its books, which should cover the dividend for an entire year.
The icing on the cake for investors is the fact that GSK offers potential for capital appreciation as well. The share price is up 22% over the past year and 30% over the past two years. That’s an annual growth rate of 14%.
Bottom line
GSK and Aviva both offer excellent dividend opportunities for income-seeking investors.
