Finding a juicy dividend isn’t the only task facing income investors — you also need to be sure the payout is sustainable as well. The following two FTSE 100 stocks both offer well-covered dividends, but are there other dangers?
The Next step
Embattled high street retailer Next (LSE: NXT) doesn’t immediately strike you as one of the safest stocks on the FTSE 100, its shares having plunged on disappointing Christmas sales. We knew life would be tough for clothing retailers post-Brexit, with wages squeezed and imported textiles more expensive in sterling terms, and so it has proved.
The crunch continued in March, with a reported 3.8% drop in underlying pre-tax profits to £790.2m and warnings that 2017 would be another tough year, with profits possibly dropping to between £680 and £780m. Chief executive Simon Wolfson blames a combination of “economic, cyclical and internal factors” working against the company, which at least acknowledges that outside forces are not entirely to blame. The company has made mistakes, with its online presence and fashion trends failing to catch the zeitgeist.
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Fashion fun
However, the sell-off looks overdone, and now could be a good entry point, with Next trading at just 9.7 times earnings. Its current dividend yield of 3.7% is bang in line with the FTSE 100 average, but cover levels are nice and high at 2.8 times. There may be scant progression in the immediate future, with a forecast 8% drop in earnings per share over the next year, followed by a further 1% drop.
However, the yield is nonetheless forecast to hit 4% by 2019, while the first of the four 45p special dividends promised in the January trading statement will be paid on 2 May. Operating margins may have dipped, but at a forecast of 17.7% they still beat most of the retail competition. There may be more trouble ahead, but Next’s dividend looks solid.
The magic number
Private equity and infrastructure investor 3i Group (LSE: III) has had a dramatically different year, its share price soaring 55% in the past 12 months. Over five years, it is up almost 245%. This fast-growing stock also offers some income fun as well, with a dividend yield of 3.1%, impressively covered 3.9 times.
3i Group earns its money by buying and overhauling mid-market businesses, then building them into international operations, and reinvesting profits into new ventures. It has done well in an era of rising share prices and although it has slowed lately as confidence drains from the Trumpflation play, that doesn’t worry me overly.
Power play
This company has a proven track record and gives you access to a sector — private equity — that almost no other FTSE 100 company does. It also owns an infrastructure fund, which is a lucrative sector to be in, generating both regular management fees and capital gains, while also upping the exposure to market swings.
Currently, the stock trades at 725p, a massive 25% premium to its estimated net asset value of 559p. This reflects strong performance and high investor confidence. That share price performance is likely to be more volatile going forwards, but we should still see the power of 3i.
