Yield and where to get it will remain a hot topic among investors while global interest rates hover near zero.
True, interest rates may have risen a touch but so has inflation (in the UK at least) and high yielding and safe(ish) dividends are in demand more than ever.
The latest research from online broker AJ Bell shows that the FTSE 100 is forecast to pay out a total of £88.5bn in dividends in 2018, a 7% increase on the 2017’s expected total.
“This equates to a yield of 4.3%, way better than anything that can be earned on cash or the benchmark 10-year Government Gilt yield of 1.2% and therefore a potential source of support for UK stocks next year. “
The golden rule remains the higher the yield, the greater the risk, but with a number of household names offering up to 6% or more even, is there an opportunity among the FTSE 100 laggards.
AJ Bell points out that dividend cover (a ratio of earnings divided by payouts) is thin and investors need to choose carefully.
Tom Selby, an analyst, said: “Income remains an important strategy but investors need to ensure they do not over-reach for yield and leave their capital exposed to undue risk.”
Oil titans regain poise
If this article had been written a year earlier, BP PLC (LON:BP.) and Royal Dutch Shell PLC (LON:RDSB) would have been two names to feature heavily.
The oil price slump had exposed the balance sheets of even these titans and led to predictions that Shell’s proud boost of never having cut the dividend might be under threat.
A year on and things are looking altogether more comfortable for the pair.
Crude oil is back close to US$60 per barrel and major divestments has seen the dividend cut talk dissipate.
Indeed, the decision by both BP and Shell to scrap their scrip divided schemes and in future only pay dividends in cash underline a growing management confidence in their financial state.
A recent upgrade on BP by Deutsche Bank’s Lucas Herrman made the point.
Third quarter earnings were better than expected, Macondo costs are declining and ‘execution risk’ has reduced, he said.
“Yet with the business placed to increase free cash flow by $8bn over the next three years in a $55 per barrel environment the 6% plus dividend yield feels overly generous.”
Shell, too is yielding almost 6% even though some analysts such as UBS have increased the forecasts for crude prices for the next two years.
Lloyds a ‘banker’
Up until the recent Bank of England stress tests Lloyds Banking Group PLC (LON:LLOY) was seen an as one of the best bets for yield in 2018 among the FTSE 100 members.
The bank is tipped to raise the dividend to 4p this year and by 0.5p increments to 5p in 2019.
That gives a yield of 5.9% for the current year rising to 7.5% in 2019, which also looked generous for a bank in a rising interest rate environment and that is seeing light in the tunnel of its PPI payments.
That was until the latest Bank of England disaster scenario stress tests, when Lloyds came out a little short of capital.
Simplifying that, the more capital a bank has usually means the more it can return to its shareholders, so there were suggestions that Lloyds may have to rein back its dividend plans.
The full year statement and strategy for future payouts will be the key thing to watch here.
Lady Bracknell would not be impressed
Centrica PLC’s (LON:CNA) yield currently is 8.3%, which is indicating there is a good chance it will be reduced in the future. Indeed, a cut is being priced in.
The share price slumped as the British Gas owner warned full year earnings will be lower than market forecasts as it lost 823,000 accounts in the four months between June and of October.
Of course, some commentators point out that Centrica is under intense pressure from the government and regulator to reduce its tariffs and it might be in its interest currently not to be seen to be making too much money.
If you go along with that, there might be value but it is a high risk strategy and as with all yield situations it is down to how much an investor is prepared to gamble for that extra couple of percent.
Yield chasers
AJ Bell’s Selby points out the danger of chasing yield too aggressively.
“A number of high-profile dividend cuts in the UK (Pearson, Provident Financial, Carillion) or the fear of one (Centrica) crushed share prices and inflicted losses on shareholders in stocks which had looked to offer an attractive dividend yield.”
You have been warned.