If you’re looking for a steady income stream from dividends, the best shares to choose should depend on your timescale. If you’re already retired, or otherwise wanting the income to spend today, looking for current high yields that are likely to be sustained is your priority.
But what if you have 20 or 30 years left before you’ll need the cash and you plan to reinvest all your dividends in the meantime? Well, you might be better off looking for lower initial yields from dividends that are rising faster than inflation, as those could easily be the ones paying out the most cash when you need it.
Banks = cash
A candidate matching that requirement is Barclays (LSE: BARC) (NYSE: BCS.US). Here’s its past four years’ dividend record together with forecasts for the next two:
| Year | Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 5.09p | 2.1% | 5.53x | +120% |
| 2011 | 5.56p | 3.4% | 4.61x | +9.2% |
| 2012 | 6.50p | 2.7% | 5.91x | +16.9% |
| 2013 | 6.50p | 2.4% | 2.57x | 0% |
| 2014* |
7.30p | 3.3% | 2.96x | +12.3% |
| 2015* |
10.10p | 4.7% | 2.67x | +38.4% |
* forecast.
That’s a bit erratic, obviously. The apparently big 2010 rise only looks impressive because it came after the horrible year of 2009 when the crisis hit and dividends were slashed. And then we saw no rise at all in 2013 as earnings per share halved that year — although dividend cover was still strong.
Restructuring
Of course, during those years we were in a period of capital retrenchment, with banks needing to retain as much cash as possible to improve their liquidity and meet the Prudential Regulation Authority‘s new capital ratio requirements.
But Barclays is looking solid on the capital front now — in May, the bank reported a fully-loaded Common Equity Tier 1 ratio of 9.6%, and it’s rising.
There are fears of further misdeeds being uncovered and more fines being levied on the banking business, but it looks like Barclays is in a strong enough cash position to grow its dividend significantly over the next five years too. That 4.7% forward yield on the current share price of 212p looks attractive anyway, but what might we be seeing in the future?
Future cash
If forecasts come true, we’ll have seen the dividend just about double in five years by 2015. If that is repeated over the next five years — and I don’t think that’s too unreasonable — a payout of 20p per share in 2020 would provide a yield of 9.4% based on today’s share price, and would easily beat those dividends just creeping ahead at around the pace of inflation.