Since the start of the year, nine FTSE 100 companies have already announced cuts to their dividend payouts. With the continued downtrend in commodity prices and the outsized exposure of the Footsie index to mining and oil and gas sectors, many more FTSE 100 companies could announce cuts in the coming year.
Investors seeking yield should therefore diversify their portfolio away from the FTSE 100, in my opinion. Many mid-cap and small-cap shares have much higher levels of dividend cover, and the outlook for dividend growth is typically better. Furthermore, small-cap shares can be expected to earn higher returns than shares with higher market capitalisations over the long term.
After a series of profit warnings over the past two years, Tate & Lyle (LSE: TATE) is beginning to see its earnings turn around. Pre-tax profits rose 11% in the first half of this year, thanks to steady growth in its speciality sweetener business.
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So, although earnings have been lacklustre in recent years, Tate & Lyle does appear to be on track to deliver growth in earnings and dividends in the longer term. Its shares currently trade at a prospective dividend yield of 4.7%, and its dividend is covered 1.4 times by earnings.
Shares in Cobham (LSE: COB) currently yield 4.0%, as a combination of low oil prices, slowing emerging markets and defence spending cuts have sent its shares down 13% since the start of the year. Earlier this month, management disappointed investors by saying it now expects underlying earnings per share for the full year will come at the lower end of market expectations, which are in the range of 20.1p to 21.7p.
But, even at the lower end of those expectations, this still leaves EPS growing by 9% on a year-on-year basis. So, although trading conditions have been difficult, growth remains relatively robust. Valuations are attractive, too, with its shares trading at just 13.2 times its expected 2015 earnings, and carrying a prospective dividend yield of 4.2% with a dividend cover of 1.8x.
Shares in Carillion (LSE: CLLN) are one of the most heavily shorted in the London market, as many institutional investors doubt whether the company can deliver the growth it has promised and are becoming concerned about the company’s rising debt and cash flows. However, valuations in the company are very cheap, with shares trading at 8.8 times its earnings. In addition, its prospective dividend yield is 6.1% and dividend cover is very strong, at 1.9x.
Oil services group Petrofac (LSE: PFC) may seem to be a stock to avoid because of falling oil and gas prices, but valuations are becoming too cheap to ignore and its fundamentals are relatively robust. Margins have held steady despite a slowdown of construction activity, and a strong backlog of orders will mean revenues are relatively stable. Shares in Petrofac are expected to yield 5.1% this year, and its dividend cover is 1.2x.
Small-cap accident management company Redde (LSE: REDD) has the best fundamentals of these five shares, to my mind. Like-for-like revenue growth in its latest financial year was 16.9%, as Redde is gaining momentum with securing new contracts. And as revenue grows, this adds scale to the business, which leads to higher profit margins. Its adjusted operating profit margin has grown steadily over the past two years, rising from 3.9% in 2013, to 5.9% by 2014. And this year its margin has improved by another 2.9 percentage points, to 8.8%.
Although dividend cover is only 1.0x, Redde is highly cash-generative, which allows the company to return almost all of its cash flows to shareholders through dividends. Its shares currently offer a prospective dividend yield of 5.0%.
