If you’re new to investing, you may believe that steeply rising share prices are the key to building wealth. While this certainly helps, regularly receiving and reinvesting dividends from well-run, resilient companies whose stock appreciates more gradually can be just as profitable over the long term.
So, at the end of the first week of trading in 2017, here’s a selection of businesses for more risk-averse income hunters who prefer to search for decent yields at the market’s top table.
Dependable dividends
Mondi (LSE: MNDI) enjoyed a positive 2016. Changing hands for 1,223p back in January of last year, shares have since climbed by 35%, leaving the £8bn cap packaging and paper company offering a yield of just over 3%. This may seem rather average but seasoned dividend hunters will be aware that consistent dividend growth can be just as good as a sizeable yield. On this front, Mondi scores well with a long history of hiking its bi-annual payouts. I predict this will continue, particularly as the company expects to benefit from higher selling prices in 2017.
After a fairly depressing last 12 months — during which its shares declined by 20% — investors in ITV (LSE: ITV) will be hoping for a little more joy in 2017. In the meantime, there’s a fairly juicy 4.2% yield on offer. That’s over 3% higher than the rate offered by the best cash ISA currently available.
With decent levels of return on capital and high operating margins, the £8.2bn cap gives the impression of being a quality company, albeit one whose performance is tied to the prevailing economic conditions. While concerns over declining revenue from advertising are understandable, the company seems committed to reducing costs and increasing sales from its online operations. Those persistent takeover rumours also refuse to go away.
Despite being on the receiving end of last June’s political fallout, shares in £15bn cap insurance and investment management giant Legal & General (LSE: LGEN) have rebounded strongly. Those who embraced the stock in the chaotic few days that followed the shock vote would have enjoyed a 50% rise by the end of the year.
Sure, there could be more volatility in the year ahead but history shows that a company of Legal and General’s stature will be able to weather the storm. While negotiations with the EU continue, there’s a chunky 5.8% yield to comfort investors.
Run for cover
Are there shares offering higher yields in the FTSE 100? Absolutely. So why not select them? It’s simple. To distribute dividends to shareholders, a company’s finances need to be robust. This is why it’s so important to refrain from chasing unrealistically high yields (which often signal that a business is in trouble) and to check the level of dividend cover. That means check the ratio of net income over the dividend paid. For payouts to be safe, cover really needs to be as high as possible (and definitely more than one). With cover of 2.4, 1.9 and 1.5 respectively, the yields from Mondi, ITV and Legal & General all look secure for now.
As well as stopping themselves from automatically buying the biggest payers, those seeking income should also check that their portfolios never contain more than a couple of companies operating in the same market. Only by diversifying — both geographically and by industry — can investors mitigate the impact of one or several of their holdings reducing or completely cutting their regular distributions.
