While 2015 may have been a flat year for FTSE 100 returns, investors can find comfort in the record yields offered by many companies. Going into 2016 are investors searching for dividends better off chasing the whopping 9% yield of Rio Tinto (LSE: RIO) or settling for more staid yields at WM Morrison Supermarkets (LSE: MRW) and Standard Chartered (LSE: STAN)?
Shareholders of Morrisons were given reason to cheer over the Christmas period as like-for-like sales during these nine weeks rose 0.2%, the first sales growth in four years for the grocer. Overall sales for the period were driven down 2.6% but this was largely due to the closing of 21 large supermarkets and the sale of 140 convenience stores since last year.
The closing of unprofitable stores and focus on online sales, which nearly doubled year-on-year for 2015, are the core of management’s plan to return Morrisons to the comfortable profitability it once enjoyed. However, even if the company can right the ship internally it’s still facing the gale-force headwinds affecting all the traditional grocers. The rise of low-cost rivals Aldi and Lidl continued over the Christmas period and Morrisons was forced to keep discounting products in order to maintain market share, which still fell to 11%.
Discounts have seen Morrisons margins fall to 2% and 2016 is forecast to see further declines in pricing power. While dividend payments should be safe going forward, shares are only forecast to yield 3.5% this year. For this level of yield investors can find companies with much better growth prospects than Morrisons provides.
Over-exposed?
Yields for emerging markets-focused Standard Chartered have plummeted to 2.4% on the back of a dividend cut and rights issue in late 2015. If exposure to poor-performing Asian and African economies wasn’t enough short-term bad news for Standard Chartered, the estimated $1.9bn loaned to commodities trading firms makes it the European bank most exposed to possible defaults in the sector.
Although plans to ruthlessly cut costs and maintain focus on Asia may work in the long run, there are much better options for investors seeking both growth and dividends for years to come. HSBC being one possibility I have discussed.
Danger ahead
Rio Tinto’s fabulous 9% dividend is sure to catch the eye of investors of every stripe. Rio’s balance sheet is in considerably better shape than its major peers, and it has continued its share buyback programme as well as increased the dividend paid in the first half of last year. Despite this good news, danger may lurk just beneath the surface for the commodities giant.
Iron ore mines that were started years ago are just now beginning to come on line and Chinese demand for the metal is set to decline some 4% in 2016. So prices won’t pick up anytime soon. For Rio, which derived some 71% of earnings from iron ore according to its latest figures, this means further red ink for the bottom line is forthcoming. With questions mounting over Rio’s ability to maintain dividend payouts, I expect further pain for share prices in the near future and would recommend avoiding the poisoned apple the 9% yield represents.
