Are dividends set to soar at these FTSE 100 favourites?

Should you buy these 2 FTSE 100 stocks for their dividends?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With interest rates falling to new lows, dividends matter even more to many investors. Bond yields, interest on cash balances and property income are being squeezed, and a logical place to turn is high-yield shares such as Imperial Brands (LSE: IMB) and GlaxoSmithKline (LSE: GSK), which yield 3.8% and 4.7% respectively. However, it is their dividend growth potential that is of even greater significance.

Imperial Brands

Imperial Brands is forecast to increase its dividends per share by 10.4% in 2017. This may sound like a very generous increase in shareholder payouts, but it is below the forecast growth in the company’s earnings, which are expected to increase by 12% next year. This means that Imperial’s payout ratio will fall to around 63% next year.

This level of payout may sound high. For many companies it would indicate that there is little scope for a major increase in the proportion of profit that is paid out as a dividend. However, for a mature tobacco company, a 63% payout ratio is very low since it benefits from high barriers to entry, constant demand for its products and minimal reinvestment requirements.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

Therefore, it would be unsurprising for Imperial to increase its payout ratio to over 80% over the medium term. This would put it on a yield of 4.8% using this year’s earnings forecast.

Imperial also benefits from growth potential within the e-cigarette space. It acquired leading e-cigarette brand blu and this could act as a positive catalyst on its earnings and dividends in future years. Alongside its consistent sales and profitability from tobacco products, this makes Imperial a top notch income stock with excellent dividend growth potential for the long term.

GlaxoSmithKline

Unlike Imperial, GlaxoSmithKline’s payout ratio is exceptionally high. It currently stands at 83%, which is high for a company that requires a significant amount of reinvestment in order to develop new treatments. In fact, GlaxoSmithKline plans to freeze its dividend over the next couple of years so as to improve its financial standing. This means that its current 4.7% yield may not increase for existing shareholders over the medium term.

However, beyond that, GlaxoSmithKline has stunning dividend growth potential. Its pipeline is diverse and holds the potential for multiple blockbuster drugs. For example, its ViiV Healthcare division offers high sales growth potential and could positively catalyse GlaxoSmithKline’s future profitability.

GlaxoSmithKline’s appeal extends to its defensive nature. It is far less reliant on the wider macroeconomic outlook than is the case for the majority of its index peers. This means that even if Brexit causes problems, the US election ends with significant uncertainty and US interest rates choke off the economic recovery, GlaxoSmithKline is still very likely to be able to afford to make dividend payments. Alongside its high yield and long term growth potential, this makes it a star income play at the present time.

Should you buy NatWest Group now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of GlaxoSmithKline and Imperial Brands. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »