If you’re hunting for reliable dividends, you don’t have to restrict yourself to mega-cap FTSE 100 stocks such as British American Tobacco (LSE: BATS). Well-run smaller firms such as soft drinks group A.G. Barr (LSE: BAG) can also be a good source of income.
Similarly, while the commodity sector has a bad reputation for consistency, Randgold Resources (LSE: RRS) is an exception to this rule and is worth a closer look.
British American Tobacco
The appeal of tobacco stocks to income investors can be summed up by this Warren Buffett quote: “I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.”
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Of course, ethical considerations might put you off investing in tobacco stocks. I don’t own any myself. But there’s no denying the investment appeal of these businesses.
Despite trading at an all-time record high of 4,051p, BAT shares currently offer a 4.1% forecast dividend yield. Based on forecasts and previous years’ results, this dividend should be covered comfortably by both free cash flow and earnings per share.
The dividend hasn’t stood still, either. The payout rose by 4% last year and is 35% higher than in 2010.
The only real threat I can see to BAT’s dividend is if the group ever needs to quickly repay some of its £15bn net debt. This could restrict the cash available for dividends. However, I don’t think this is likely to be a problem for the next few years, at least.
A.G. Barr
Barr is best known for producing Scotland’s most popular soft drink, Irn Bru. But it makes lots of other drinks too. Financially, I believe it’s one of the best-managed firms in the FTSE 250.
Unlike many of its peers, Barr has consistently low debt levels. The dividend is always covered more than twice by earnings and normally also by free cash flow. This combination of a conservative payout ratio and low debt means that even in a bad year, there should be no risk of Barr cutting its dividend.
The downside of this quality is that the shares are quite expensive and the yield is low. Barr’s stock currently trades on 19 times 2016 forecast earnings and offers a prospective yield of just 2.4%.
However, Barr’s dividend has risen by an average of 9% per year since 2010. If you’re looking for a safe, high-quality payout, Barr may be worth a look.
Randgold Resources
Few gold miners have managed to emerge from the gold slump with an unbroken track record of net cash and dividend growth. Randgold has done both, while also opening a new mine and expanding production.
One of the secrets to the firm’s success is that it only develops mines where gold production would be profitable at $1,000 per ounce or less.
This focus on profit has meant that Randgold’s dividend has always been covered at least three times by earnings. The downside of this approach is that the yield is very low.
Randgold shares have risen by more than 50% since January and now trade on 38 times 2016 forecast earnings. This rise has pushed Randgold’s forecast dividend yield down to just 0.8%.
