With interest rates being at historic lows, dividends continue to be of utmost importance to a great many investors. And the prospects of an interest rate rise seem slim, since the onset of deflation means that the Bank of England would find it incredibly difficult to justify one — even though the UK economy is performing well, the main aim remains price stability.
Furthermore, even if rates do begin to rise within the next year or two, the rate at which they will move upwards is likely to be very, very slow. That’s because policymakers remains fearful of a recession and an economic slowdown, and are likely to err on the side of caution and keep monetary policy as loose as possible for as long as possible.
Top Yields
None of this is helpful for savers or those seeking an income from their cash balances. However, while one door closes, another has opened in the form of dividend-paying shares. In fact, despite the FTSE 100 being close to an all-time high, there remains a number of high quality companies, in several sectors, offering superb yields.
A notable example is Santander (LSE: BNC) (NYSE: SAN.US). It currently yields 3.3% and, while this may not be among the best yields in the index, the bank took the decision to cut dividends this year in order to increase reinvestment in the business and put itself on a stronger financial footing. A a result, its dividend appears to be highly sustainable and, with a dividend coverage ratio of 2.5 times, there is significant scope for it to increase – especially if, as expected, the global economy continues to offer a positive long term outlook.
Price Falls
While the FTSE 100 has risen close to an all-time high, not all stocks have performed quite so well, and this means that their yields are now highly enticing. For example, Glencore (LSE: GLEN) has seen its share price fall by 46% during the last five years, while Debenhams (LSE: DEB) is still down by 16% since the start of 2013 despite a strong recent run. As such, the two companies offer yields of 4.1% and 3.7% respectively — both of which are better than the 3.5% offered by the FTSE 100.
Looking Ahead
Furthermore, Glencore and Debenhams are expected to increase their shareholder payouts by 7.6% and 3.5% respectively over the course of the next year. This provides investors in the two companies with significant real terms growth in their income at a time when interest rates are showing little sign of moving upwards.
And, with Santander set to increase its dividends by 6.8% next year, all three companies offer a realistic alternative to holding cash, with their improving yields indicating financial health and good value, as well as a growing income for their shareholders.