When stock markets are in turmoil and share prices are going up and down, one of the best things to do is stick to high dividend shares and sit out the ride, happy that you’re getting a steady annual income. In fact, that’s a pretty good strategy whatever the markets are doing, I reckon.
On that score, today I’m looking at two big yielders that present an intriguing contrast.
Safer
The first is Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands. Along with the other power utilities, Centrica is known for paying out a substantial portion of its annual earnings as dividends — usually around two thirds.
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Earnings dipped in 2014 by 28%, and there’s a further smaller drop on the cards for the 2015 year just ended, and that’s led to a fall in the dividend from 17p per share in 2013 to a predicted 12p for 2015 — results are due on 18 February. But on today’s 191p share price, that would still bring you a yield of 6.3%, with the forecast 2016 yield up to 6.5%.
That big yield is due to the share price having fallen, but even if you’d bought your shares at their April 2014 peak of 345p, you’d still be looking at likely yields of 3.5% and 3.6% for 2015 and 2016 respectively — and if that’s as low as your yield gets during hard times, it’s really not too bad.
And the best way to invest in shares like Centrica, in my opinion, is regularly over a long period — that way you’ll benefit from pound-cost averaging, and once dividends start rising again you’ll enjoy higher effective yields based on the price you pay in the dips.
More exciting
My second for today is Aberdeen Asset Management (LSE: ADN), which is a very different company indeed. As an investment manager specializing in emerging markets, the Chinese slowdown has contributed to 11 quarters in a row of net cash outflows, and that’s triggered a share price collapse — at 225p today, Aberdeen’s shares are down 55% from their peak in April 2015.
But one thing that has done is pushed up the prospective dividend yield for this year to a massive 8.8%. As it stands, that would only be covered 1.2 times by forecast earnings, so it’s clearly at risk. But January’s first quarter update provided reasonable confidence for the firm’s long-term future. Although the three months saw a net outflow of £9.1bn, total assets under management had actually risen to £290.6bn between September and December.
Aberdeen has a progressive dividend policy, and has been raising its annual payment far in excess of inflation in recent years. A cut in the cash may well be inevitable over the next couple of years, but there’s plenty of room for that while still keeping a yield that’s way ahead of the market average.
Volatility? Pah!
And if emerging markets are going through a downturn, well, a bit of volatility is only to be expected. And Aberdeen has plenty of experience of dealing with it while maintaining a very prudent approach to financial management. On a forward P/E of only 9.7 for 2016, Aberdeen Asset Management shares look like a long-term ‘buy’ to me.
