With the FTSE 100 stuck in the low 6,000s and having barely moved over the past five years, strengthening in a number of sectors makes it look like dividend heaven these days. Here are three firms I think are among the best.
Best in sector?
Back in the dark days of the banking crisis, would anyone have thought Lloyds Banking Group (LSE: LLOY) would turn into the cash cow of the banking sector so quickly? I liked the look of Lloyds’ resumed dividends, which is why I bought some, but we’re already seeing more than I’d hoped for in a very short time.
Uninspiring EPS forecasts (an 11% drop this year followed by a 2% rise in 2017) have led to a poor share price performance, with Lloyds shares down 19% over the past 12 months to 71p, and down 13% over two years. But with Lloyds’ dividend expected to almost double this year, the fall has helped boost the forecast yield to 6.3% — with 2017 predictions taking it as high as 7.3%. But can these dividends be maintained in the light of weak earnings forecasts?
I think so, if we look beyond the short term. In its Q1 update, Lloyds reported an underlying profit of £2.1bn, stressing its focus on sustainable growth, as chief executive António Horta-Osório highlighed Lloyds’ “differentiated, simple, low-risk business model“. I’m holding and taking the cash.
Cash from oil
The big fear surrounding the 7.6% dividend yield on the cards this year from BP (LSE: BP) is whether it will actually be paid. Forecast earnings for the year wouldn’t cover even half of it, and that’s usually a big warning sign. But back when the oil price slump was in its infancy, BP boss Bob Dudley expected two or three years of cheap oil and affirmed BP’s commitment to maintaining its dividend — the company has plenty of cash to cover it in the short term.
So far that’s been happening, with BP’s Q1 dividend this year coming in as expected. And looking forward, a sharp EPS rise forecast for 2017 would see earnings exceed dividends once more — only just, but it’s the right direction.
That’s with oil having recovered to around $50 a barrel, and the signs are that trend is likely to continue. Many are expecting it to fetch around $75 by the year-end, and at that level I reckon BP’s dividend would be safe.
Insurance recovery
Now for what I see as the most attractive company in the insurance sector, Aviva (LSE: AV). I bought some after being impressed by its focus on fixing its balance sheet with a view to building a solid long-term business, and by its reasonably speedy resumption of dividend rises after having been forced to slash its annual payout in the depths of the crisis.
Persistent weak sentiment in the sector has led to a 13% share price fall in 12 months, to 445p, and a 17% drop in two years — and fears of a possible EU leave vote devastating the UK’s financial sector won’t be helping. But with dividends rising while shares are falling, we’re looking at potential yields of 5.4% and 6% for this year and next.
With chief executive Mark Wilson telling us in Aviva’s 2015 results announcement that the insurer’s “balance sheet is one of the strongest and most resilient in the UK market” after tripling its economic capital surplus over four years, I see Aviva’s dividend as super safe.
