The more I write about income stocks, the more I like them. The compounding effects of re-investing dividends for growth still dazzles, especially as most companies aim to increase their dividends year after year. Here are two top dividend stocks I would happily buy and stick away for a decade or more: one a solid growth prospect, the other with turnaround potential.
Lower level
But what’s this? Here’s something new. The share price at British American Tobacco (LSE: BATS) has fallen sharply in recent days, following the announcement that US regulators want to lower nicotine levels to cut tobacco-related deaths. Last Friday, the US Food and Drugs Administration said it aimed to lower nicotine levels in cigarettes to non-addictive levels, instantly knocking 12% off British American tobacco’s share price.
The company is down another 3.6% today, so markets clearly think this is a big deal. However, British American tobacco has fought off plenty of regulatory and health initiatives before, and now much of the potential pain has been priced in. So this could be an opportunity.
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Income winner
Last Thursday, it posted a strong set of half-year results with revenues up 15% year-on-year, helped by sterling weakness, and profits up 16.3% at £2.57bn. It declared an interim dividend of 56.5p, up 10% on last year, as it moves towards paying quarterly dividends from January. The yield is currently a forecast 3.7%, with solid cover of 1.6. Forecast profit growth looks promising: City analysts expect 2016 profits of £6.24bn to leap to £7.56bn in 2017, then to top £10bn in 2018, helped by the recent Reynolds acquisition.
Smoking may be in serious decline, particularly in the West, but British American Tobacco has shown time and again it is able to keep publishing massive revenues and serving up generous dividends, and I don’t see this changing. The group’s market share continues to grow, up 30 bps, with its Global Drive Brands up 50bps. This is important, as volumes come under pressure from continuing health campaigns. New-generation alternatives such as vaping may help offset declines in revenues.
Good to TalkTalk
Broadband and bundle supplier TalkTalk Telecom Group (LSE: TALK) has also wobbled lately. Last autumn the share price took a hammering after cyber hackers gained details of 150,000 customers, for which it was slapped with a £400,000 fine. This overshadowed positive news of a tripling in half-yearly pre-tax profits to £46m, up from £14m one year earlier.
TalkTalk suffered another blow earlier this month, reporting that revenue slid 3.2% in the three months to the end of June. This was down to a drop in consumer revenues due to a smaller average on-net base and the dilutive effect of re-contracting activity, although it still expects full-year revenues to grow. Customer churn is shrinking, while it now has 1.3m customers on fixed price plans.
Income hit
In May, TalkTalk took a knife to the dividend as it looks to resume its former role as a low-cost challenger to BT, Virgin and Sky. However, it is still forecast to yield 4.6% in 2018, with cover of 1.2, down from 5.52% today. With the share price of 185p well below its year-high of 250p, this a tempting entry point for long-term buy-and-holders.
