Who was the prime minister who once said we’ve “never had it so good“? Harold Macmillan, it was, and I often think of his words when I look at the great crop of dividend stocks currently sitting there in the FTSE 100 just waiting to be picked.
According to AJ Bell’s quarterly Dividend Dashboard report, over the next year the FTSE 100 is set to hand out £87.5bn in dividends, with an overall yield of 4.4%. That’s significantly above the long-term yield from our top index, but which individual shares should we be buying?
Safe as houses
The housebuilding business is facing mixed sentiment at the moment, having gone through a bit of a wobble over the past few months. My pick today, Persimmon (LSE: PSN), has seen its shares fall by 4% so far in 2018, after having soared by 800% over the past decade.
That meteoric rise had to ease off eventually, and I’m sure there are investors taking their profits and looking for the next undervalued sector.
But that still leaves Persimmon, and the rest of the sector, on very modest valuations and offering high dividend yields. And best of all, Persimmon is selling a product that is still in high demand and likely to stay that way — we have a big housing shortage in the UK, and thats not going to end soon.
Based on forecasts, we’re looking at P/E multiples of around 10, significantly below the Footsie’s long-term average of around 14 (and other things being equal, lower is better).
And the dividend is expected to deliver yields of almost 9% this year and next, as the firm continues to return surplus capital to shareholders. Special dividends of 125p per share for three years are currently part of the plan, with a total surplus of £2.22bn expected to have been paid to shareholders by July 2018.
Further ahead, even after the special 125p payments are completed by 2020, I can still see Persimmon generating strong cashflow and paying attractive dividends long term.
Endless demand?
In this energy-hungry world, it may seem surprising that oil went out of favour so recently — but then it did drop to under $30 a barrel at the start of 2016, due to a production glut.
Throughout the crisis, and with an eye to a long-term recovery in prices, Royal Dutch Shell (LSE: RDSB) kept its dividend going at 188 cents per share (143p at current exchange rates), even when it wasn’t covered by earnings.
This year, with the price of a barrel back up to around $75, Shell’s dividend looks set to be covered around 1.5 times by earnings, rising to 1.6 times in 2019. Dividend yields should be close to 5.5% — but if you’d bought when Shell shares were at their lowest in early 2016, you’d have locked in effective yields of around 10%!
That, to me, shows one of the best things about investing in top Footsie shares with reliable dividends — downturns in the share price give us opportunities to top up and boost our long-term income potential.
And I do think think Shell’s dividend is one of the most secure there is in the index. Despite the move to renewable energy sources, there’s still very little with the energy density of oil, and I expect the black stuff to be in massive demand at least for the rest of my life (I’m 59).
