UK investors are facing a dividend drought. Over half of the FTSE 100 companies have cut, cancelled or suspended their dividends. According to an analysis of data from dividenddata.co.uk, 471 UK-listed companies have slashed payments to shareholders. But, there are some oases in the dividend desert. There are still FTSE 100 dividend hero stocks out there.
What makes a dividend hero? Well, I would say its a share that has at least maintained its regular dividend payments for a decade. Perhaps, more importantly, they have continued to pay dividends throughout the coronavirus crisis. FTSE 100 dividend hero stocks come in all shapes and sizes. I have looked at what I think are the safer options before. Now its time for some cheap ones.
FTSE 100 dividend heroes
British American Tobacco (LSE: BATS) and Legal & General (LSE: LGEN) meet the criteria of FTSE 100 dividend hero stocks. They also look cheap right now based on their forward (or forecasted) price-to-earnings ratios. Also, these two stocks have high forecasted dividend yields.
Should you invest £1,000 in British American Tobacco right now?
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Shares of Legal & General are available for around 178p right now. Analysts are forecasting an 18.94p dividend for 2021. The forward dividend yield on Legal & General shares is a hefty 10.6%. And, as I said, shares in this life and general insurer and investment manager look cheap. The consensus for 2021 earnings per share is 29.07p, which means these shares trade on a forward price-to-earnings ratio of just 6.13.
| Stock | Industry | Current Share Price |
Dividend Forecast for 2021 |
Earnings Forecast for 2021 |
Dividend Yield Forecast for 2021 |
Dividend Cover Forecast for 2021 |
Forecasted P/E Ratio for 2021 |
| Legal & General | Financials | 178p | 18.94p | 29.07p | 10.6% | 1.53 | 6.13 |
| British American Tobacco | Consumer Goods |
2,698p | 227p | 347p | 8.4% | 1.53 | 7.78 |
British American Tobacco also looks cheap trading on a low forward price-to-earnings ratio of 7.78. With shares price around 2,698p and a forecasted dividend of 229p, British American Tobacco shares also have an impressive forward dividend yield of 8.4%.
Trick or treat?
Cheap shares can sometimes be a trap. They might not be bargains. Instead, they may be low priced because that is what they are worth. The economy has been drastically affected by the Covid-19 pandemic. So, to call these cheap shares genuine bargains we have to be confident their businesses are in good health.
Legal and General’s half-year report, released in August this year, was encouraging. Some divisions had suffered, from rising insurance claims, for example, but others had performed well leading to operating profits falling by a modest 6%. Net income fell by 67%, which is dramatic. However, non-cash charges, made to account for falling interest rates affecting Legal & General’s insurance reserves, were the cause. Trading conditions are improving, and Legal & General’s solvency and liquidity are not in doubt.
British American Tobacco reported robust performance in emerging markets, in its half-year report. Cigarette volume sales were up by 0.5%, but overall, revenues were flat compared to the first half of 2019. However, the company’s management is confident of achieving high single-digit earnings per share growth over the medium term. Perhaps this optimism underpinned the decision to maintain a 65% of earnings dividend payout ratio.
Both of these shares have attractive dividend yields. Also, both have low forward price-to-earnings ratios their businesses have shown resilience during this global pandemic. So, there we have it: British American Tobacco and Legal & General are two cheap, high-yielding FTSE 100 dividend hero stocks I’d buy today and hold forever.
