Are you looking for outstanding dividend picks in the market’s end-of-summer sale? Look no further than the top yielders among the blue-chip holdings of renowned fund manager Neil Woodford.
Right now, Woodford favourites GlaxoSmithKline (LSE: GSK), Centrica (LSE: CNA) and Legal & General (LSE: LGEN) are all offering yields in excess of 5% — well above the FTSE 100 average.
| Â | Recent share price |
12-month forecast yield |
|---|---|---|
| GlaxoSmithKline | 1,310p | 6.1% |
| Legal & General | 249p | 5.6% |
| Centrica | 236p | 5.2% |
GlaxoSmithKline
GlaxoSmithKline has suffered in recent years from the unwelcome effects of expiring patents on some of its top-selling products. However, the Footsie’s biggest pharmaceuticals’ firm is nearing the end of what will be a four-year run of earnings falls, because earnings growth is forecast to return in 2016.
Glaxo has said it intends to peg the annual dividend at 80p a year through to 2017, giving a 6.1% annual income for the period. (There’ll also be a little extra from a one-off special dividend of 20p that’s planned to be paid alongside the 2015 Q4 payout.) Dividend increases should be able to resume after 2017, if Glaxo’s guidance of mid-to-high single digits earnings growth is on the mark.
Woodford considers Glaxo a core income stock. Also, the market’s focus on short-term earnings in recent years has put the shares at a discount to a sum-of-the-parts valuation of the group, giving good scope for share price appreciation in the future.
Centrica
Centrica — the owner of British Gas — is another blue-chip company that is going through a phase of earnings declines. Unseasonable weather hurt the company last year, while low oil and gas prices are impacting on the group’s upstream business this year.
Under a new chief executive, Centrica announced earlier this year that it was “rebasing” its dividend 30% lower (a move Woodford didn’t think was entirely necessary). Despite the cut, the yield has risen to 5.2%, because the shares have fallen, with the market not being enamoured by the short-term outlook of a 7% earnings decline this year and meagre growth of 1% next year.
Centrica’s shares are now trading at a multi-year low, so investors today are getting a better dividend yield than Woodford was able to secure on purchases he made last year and earlier this year.
Legal & General
Legal & General has no earnings worries. The insurer and asset manager has been posting double-digit annual growth in recent years, and is set to continue doing so for the foreseeable future. The dividend has increased faster than earnings since the financial crisis, because management decided to gradually lower cover as recovery gained momentum.
The dividend should now start to move in step with earnings. But who can complain when there’s currently a 5.6% starting yield and the prospect of dividend increases tracking double-digit earnings growth? Not Woodford. Legal & General is the only FTSE 100 financial stock he considers worthy of holding.