Although 2016 is less than two trading sessions old, the FTSE 100 has fallen by 2.25% since the turn of the year. While this rate of fall is unlikely to continue beyond the short term, volatility could remain a key feature for investors this year. That’s because commodity prices look set to fluctuate, US interest rate rises are causing some uncertainty and, when combined with a slowing China, there’s potential for yo-yoing investor sentiment.
Dividends and a resilient business model are likely to be key this year with investors seeking less risky options should volatility remain above average.
One stock that ticks both boxes is National Grid (LSE: NG). It currently yields 4.7%, around 20% higher than the wider index’s yield. It’s expected to increase dividends per share by 2.4% in the next financial year to offer a real-term increase in income for its investors.
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National Grid has an excellent track record of dividend growth with shareholder payouts having risen by 20% in the last five years. This bodes well for future increases in dividends. A dividend coverage ratio of 1.4 indicates that there’s sufficient headroom to raise medium-term shareholder payouts.
In addition, National Grid remains one of the most defensive stocks in the FTSE 100 and isn’t subject to the same degree of political risk as a number of its utility peers. And with its earnings being relatively less correlated to the macroeconomic outlook, its shares could perform well in 2016 if investors continue to seek out safer havens.
Full steam ahead
Similarly, insurance company Admiral (LSE: ADM) is a top income stock, currently yielding 5.9%. Although its income return is less stable than that of National Grid, Admiral has a good track record of increasing dividends over the last five years and as such, could benefit from buoyant investor demand for income-producing assets.
As highlighted in its recent update, Admiral continues to make encouraging progress in its key UK motor insurance market. Its customer base rose to 3.18m from 3.15m in the previous year, with premium increases having also been successfully implemented. And with the scope for a continued improvement in the company’s combined ratio (which fell to 73.1% in the first half of the year from 76.8% a year earlier), it appears to be moving in the right direction and worth buying at the present time.
Overcoming obstacles
Meanwhile, agriculture, food and engineering company Carr’s Group (LSE: CARR) has shown a high degree of resilience recently. Today it said it’s on track to meet full-year expectations despite major disruption to its operations as a result of flooding in northern England. That’s because the direct financial impact will be covered by insurance. And while its engineering division has made a relatively slow start to the year, Carr’s still expects it to trade in line for the full-year due to its performance being weighted towards the second half.
Looking ahead, Carr’s is forecast to post a small fall in earnings per share (around 1%) in the current financial year. However, with its shares trading on a price-to-earnings (P/E) ratio of 10.9, this seems to have been priced-in by the market. While Carr’s currently yields just 2.6%, its payout ratio stands at just 28% and this indicates that dividend rises could be brisk over the medium-to-long term. As such, now could be a good time to buy a slice of the business as part of a diversified portfolio.
