With interest rates still at just 0.5% and apparently unlikely to post brisk gains in the coming years, dividends remain a crucial aspect of investing. That’s amplified by the disappointing returns currently available on the FTSE 100, with the index yo-yoing between 6000 points and around 6200 points in recent weeks.
Therefore, buying companies such as National Grid (LSE: NG) appears to be a sound move. For starters, it offers a yield of 4.7%, which is many times higher than the best savings rates on offer, but also because National Grid offers a stability and reliability when it comes to dividend payments that is hard to match.
For example, National Grid’s business model is highly resilient and is perhaps the least cyclical of all companies listed on the FTSE 100. Because it is focused on energy transmission, rather than supply, it does not seem to come with the same degree of political risk as other non-cyclical utility companies which are often criticised in the media and politicians and, therefore, suffer from weaker investor sentiment. Furthermore, National Grid has increased dividends per share in each of the last five years and, with dividends being covered 1.35 times by profit, there is sufficient headroom to allow for continued rises in future years.
Similarly, British American Tobacco (LSE: BATS) is also a reliable dividend payer, with its shareholder payouts having risen at an annualised rate of 6.5% during the last five years. Although dividends now represent 75% of profit, there is scope for British American Tobacco’s payout ratio to increase owing to the fact that it is a very mature business which does not need to reinvest substantial sums in order to grow. This should mean that the company’s 4.2% yield continues to rise in future years.
In addition, British American Tobacco also has substantial growth potential, with its move into e-cigarettes having the scope to deliver top and bottom line rises as the world becomes increasingly health conscious. And, while it has its own e-cigarette offering called Vype, M&A activity could easily be undertaken in future to give British American Tobacco a stronger hold on the new industry.
Meanwhile, insurance company Admiral (LSE: ADM) remains one of the highest yielding shares in the FTSE 100, with its yield currently standing at 6.3%. Clearly, there are potentially challenging times ahead for the company, with changes to insurance premium tax likely to impact on the wider market and cause a degree of pressure on margins moving forward.
However, Admiral remains a well-run business with an excellent track record of profit growth. In fact, its bottom line has risen at an annualised rate of 11.7% during the last five years and, while growth of just 1% is being forecast for next year, Admiral’s longer term prospects remain bright due to its niche offering and strong competitive position within the car insurance space.