There’s no doubt about it, there are some stonking yields currently on offer from a number of companies in the FTSE 100.
However, investors should beware in my view – there is much more for income seekers to consider than just the dividend on offer from some of the 6%+ yielders. Indeed, in my view there are far better investments for those of us on the hunt for income from our investments.
Today I’m considering the prospects for investments in easyJet (LSE: EZJ), which sports a yield of just over 3%, Rio Tinto (LSE: RIO), currently set to yield almost 7%, and finally BHP Billiton (LSE: BLT) – if forecasts are to be believed here, the shares are offering over 9%! You won’t find that in a bank account anywhere in this country…
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The story in a chart
As we can see, rather unsurprisingly, the miners have underperformed an underperforming blue-chip index as commodities continued to trend downwards, add global growth worries and the ever-present danger of a slowdown in China, and you have a perfect recipe for a weak share price.
Conversely, easyJet has outperformed, buoyed to a degree by lower oil prices and more customers looking to take advantage of a weakened Euro (and the dismal UK weather on offer).
The biggest yielders
As the share price of the miners fell, so the prospective yield on offer has grown. While this may appear attractive to some income seekers, I would urge caution.
Whilst it is safe to say that both management teams have reaffirmed their intention to continue with progressive dividend policies, as an investor I am concerned over the debt pile of both businesses. Management are wrestling with significantly lower commodity prices and having to find ways to cut costs in order to service the debt as well as distribute chunky pay-outs to shareholders.
Additionally, the distributions are not fully covered by earnings, which means that the business is paying the dividend with either retained earnings from a previous year, or funding it with debt. Put simply, this practice is unsustainable going forward.
On the other hand, easyJet has a substantial dividend cover of over 2x earnings, which suggests that the company has ample room to pay — and more importantly, grow — its dividend.
In addition, the board has settled on a pay-out ratio of 40% of profits after tax, and to pay any excess cash to shareholders in the form of special dividends, the last of which was paid in 2014.
Furthermore, the forecast pay-out for the year ending 2016 is set to increase by 12% to 62p and by 26% to 78p for the year ending 2017, which equates to a 3.6% yield for 2016 and a 4.55% in 2017.
In short, this dividend — although currently giving a yield of around 3.2% — has the potential to grow significantly going forward as well as offering the potential for special dividends along the way.
The final chart of the day
In fact, when the chart is stretched out over three years, it is much clearer to see how easyJet has outperformed both the miners and the main index.
In fact, had you bought the shares at 675p three years ago, each of your shares would have paid out a total of 114.5p and more than doubled in price, giving patient long-term investors a total return of over 175%. That’s not a bad result for sitting on your hands!
Of course there are no guarantees that the shares will perform as well as this over the next three years, but given the issues facing the mining companies currently, the choice for me is an easy one: easyJet offers a safer, lower yield with strong growth potential.
