Four long-term dividend payers to buy now
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Associate Editor
David Stevenson Jan 11, 2010
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A major - and growing - concern for many investors, particularly right now, is finding a decent income from their investments. And it's even harder to find one that has a good chance of increasing over time.
Present returns on cash are very poor. And while yields on UK government bonds - gilts - are rising as we've explained recently (Will the government bond market blow up?), these aren't exactly a risk-free investment. If you buy long-term gilts now - i.e. with more than ten years to maturity, where the best interest rate levels are - you might have to hold them for the full term just to get your capital back.
The other problem is that gilts pay a fixed rate of interest, or coupon. You receive exactly the same income return each year that you hold them.
But there is a way of generating an income stream that history tells us is likely to rise over time - in the stock market. What's more, while you may have to be patient, there's a good chance you'll make a good long-term capital gain too...
What income seekers should be looking for
Several major UK stocks have hiked their payouts to shareholders consistently over many years. So by buying into this track record, you'd hope to gain access to a steadily rising income stream over time.
Sounds great. But it's not guaranteed to give you a high level of income right away. The stock market isn't stupid. Investors en masse have worked out which stocks have put on stellar dividend displays long-term, and tend to reward them accordingly. In other words, the yield on many of these fast payout-producing stocks has been driven down as their prices have risen to factor in future dividend growth.
This means that income seekers need another incentive too. So I've been rooting around Bloomberg data to find shares which combine three virtues.
What are they? First, a track record of paying higher dividends for each year of the past decade. That covers a full economic cycle. Second, stocks where the payout is expected to increase both this year and next. And third, a yield about 25% higher than the FTSE 100 average of 3.25%, i.e. about 4%. That way, you should get the best of both worlds – rising dividends, and a decent yield to boot.
Before I start, let me just talk you through some of the jargon. The 'historic' yield is the total of dividends paid by a stock over the last 12 months divided by the share price. Meanwhile the 'prospective' yield is made up of likely payouts over the next 12 months. Do note that some of this money has already been made by the companies concerned. A firm whose year-end was 31 December 2009 generally won't yet have declared its final dividend for that year.
Four solid dividend payers to buy now
So what are the FTSE 100's best-yielding progressive dividend payers of the last 10 years? (Just be aware, I've excluded special dividends and returns of capital).
The name at the top of my list is, perhaps surprisingly, a financial stock. ICAP (LSE: ICAP) is the world's premier inter-dealer broker across markets from shares to shipping. ICAP has upped its payout by a compound 23% since 2000. Yet at 450p the historic yield is almost 3.9%. Analysts now see dividend increases slowing, yet the prospective yield is still around 4%.
Next comes Britain's biggest utility Centrica (LSE: CNA). This has lifted dividends by 18.5% compound over the period. At 277p, Centrica's historic yield is 4.5%, while shareholders can expect a 4.7% prospective return.
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We've been tipping tobacco stock BAT (LSE: BATS) for several months. This has grown dividends by almost 15% a year since 2000. Yet at 2,033p it still yields 4.4% historically, with over 5% in prospect.
Power provider Scottish & Southern Energy (LSE: SSE) is another of our favoured 'defensive' stocks. This has seen 10% yearly payout increases over the period. Last year's yield was 5.8%, which is forecast to rise to 6.1% during the next 12 months.
And one to watch
Publisher Reed Elsevier (LSE: REL) has boosted dividends by 8.5% over the last decade. At 501p, Reed's historic yield is 4.1%. Analysts aren't sure the dividend will be nudged up this year, so it could pay to put this one on the watch list. But the company appears to be selling off some of its loss-making US titles, which bodes well for the future.
Just to emphasise, this isn't really about the short-term relative merits of the individual stocks, but about finding a rising long-term income. What's interesting about these particular firms is that even though they have steadily grown their payouts, they've mostly fallen out of favour with the market recently. That's why they are relatively high-yielding compared to the market – their dividends have grown faster than their share prices.
But that's great news for long-term investors. One of the best times to snap these sorts of stocks up is when most investors are looking the other way. When such stocks return to fashion, you're already safely on board, ready to cash in.
And there will be some juicy dividend payouts on offer very soon. BATS, for example, has a chunky final dividend on the way. We'll get full details on 25th February, but the analyst consensus is for a payment of just over 71p per share, equal to a yield of 3.5% by itself. But you'd need to buy BAT shares before 10th March to collect this.
By the way, if you're specifically interested in generating an income from your share portfolio, you should be reading Stephen Bland's Dividend Letter newsletter. Stephen's strategy is all about finding solid dividend payers to generate a long-term income. If you're tempted by any of the shares I've mentioned above, then you'll find Stephen's views very interesting.
An update on King Coal
And just before I go, in October last year we ran a cover story on investing in coal (Why King Coal is set to take back its throne). We tipped three coal stocks, and both Centennial Coal (AU: CEY) and PT Adaro Energy (GR: A64) have since done very nicely, up 28% and 39% respectively in pound terms. But Gloucester Coal (AU: GCL) has done even better, after attracting a bid. As a result, the share price has soared by almost 65% in the last three months. We still like the sector, but if you bought in after reading our piece, it's very tempting to lock in such a good short-term profit, at least on the latter stock.
Our recommended article for today
Many investors believe that 'how January goes, so goes the year'. But is it true? And can the market's performance so far this year tell us anything about the future of the current rally?
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