National Grid (LSE: NG) has a reputation of being a defensive dividend stalwart, which should have a place in any long-term investor’s portfolio.
But National Grid has become a crowded trade during the past five or six years as investors have used the company as an alternative to savings accounts. It’s easy to see why — National Grid is a low-risk company, and the dividend yield of 5.0% is attractive in this low-interest rate environment.
However, this stellar run could come to a sudden halt if interest rates begin to rise. Indeed, there is some evidence that shows defensive stocks like National Grid act like bonds when interest rates rise — their price falls as investors all rush for the exit.
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And with this being the case, some professional investors are now swapping traditional income stalwarts like National Grid for second-tier dividend champions, such as Ryanair Holdings (LSE: RYA), easyJet (LSE: EZJ), ITV (LSE: ITV) and Persimmon (LSE: PSN).
Second-tier champions
Ryanair, easyJet, ITV and Persimmon are not every investor’s first choice when it comes income. All four companies don’t offer much in the way of a regular payout, but they do pay out regular, special dividends, which gives them an edge over other income plays.
Take easyJet, for example. Since 2011, the company’s regular dividend payout has risen by more than 50%, and at present, the group supports a regular dividend yield of 2.6%. On top of this regular payout, the company has issued a special dividend every other year. All in all, since the beginning of 2011 easyJet has paid out 190p per share in dividends to investors, around 40% of the company’s 480p share price at the beginning of 2011.
Similarly, ITV has paid an annual special dividend to investors since 2011. ITV’s regular special payout has historically been 100% of the regular dividend. At present, ITV supports a starting yield of 2%. After adding in the special payments, the yield rises to more than 4%. The company has paid out 28p per share to investors since the beginning of 2011.
Ryanair pays no base dividend, but every two years the company has returned a chunk of cash to investors. At an average of €0.35, the payouts are equal to a yield of around 2.5%.
A yield of 2.5% isn’t much to get excited about. Still, since 2011 Ryanair’s shares have returned 260%, including income the total return over the same period is 321%.
Persimmon is chucking out cash. As part of management’s strategic plan to return £1.9bn (£6.20 per share) to investors, management declared a special dividend of 95p per share this year. Alongside a regular payout of 10p per share per annum, Persimmon is planning a special dividend of 110p for June 2017, June 2019 and a final special payout of 115p per share for June 2009.
The company currently trades at a forward P/E of 13.5 and supports a dividend yield of 4.8%.
