With UK interest rates likely to remain low for some time, dividends are set to become an even more important feature of investing. And, while a great headline yield can be a useful starting point, there is much more to buying income stocks than the current yield.
For example, British American Tobacco (LSE: BATS) (NYSEMKT: BTI.US) currently yields a very appealing 3.9%, but this does not paint the full picture. That’s because British American Tobacco has an excellent track record of paying dividends, with it having increased them in each of the last five years.
In fact, British American Tobacco’s dividends per share have risen at an annualised rate of 6.7% in the last four years, which provides an indication of the real terms increases that could be on offer moving forward.
It also shows that British American Tobacco can be considered a reliable income play, with its earnings being among the most stable in the FTSE 100. This compares favourably to AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) sales, which are far less consistent than those of British American Tobacco, simply because the loss of key drugs can send its earnings (and dividends) downwards.
This has been the case in recent years, with AstraZeneca being forced to hold its dividend flat since 2011 as patent losses and generic competition have taken their toll on the company’s bottom line.
And, while in future AstraZeneca is expected to return to growth, this is not anticipated to occur until 2017 at the earliest, which means that significant growth in dividends could be severely lacking between now and then. As such, AstraZeneca’s current yield of 4.1% may not expand over the next couple of years unless its share price falls.
Of course, AstraZeneca’s dividend payout ratio is still below that of British American Tobacco even though the former’s earnings have slumped in recent years. While this would normally indicate that AstraZeneca has more scope to increase dividends than British American Tobacco, the stability of the latter means that, in actual fact, its 71% payout ratio (versus 66% for AstraZeneca) seems rather modest and could go much higher over the medium term, thereby providing an even brighter outlook for income-seeking investors.
So, while AstraZeneca’s headline yield of 4.1% is higher than British American Tobacco’s 3.9%, the added stability, consistency and track record of the latter make it a far more appealing income play. In fact, with the potential for additional growth in emerging markets and in the e-cigarette space, British American Tobacco could prove to be one of the most appealing stocks in the FTSE 100 at the present time, with it being all set to deliver a stunning total return in the long run.
