The FTSE 100 slide has left big-name stocks on mind-boggling yields of 6% or 7%, notably in the stricken banking, supermarket, oil and mining sectors.
The danger is that sky-high yields can come crashing down to earth, as investors in Barclays, Lloyds Banking Group, and Tesco know to their cost. They can also make investors a bit sniffy about companies offering less dramatic but potentially more sustainable dividends, like the four companies I’m going to discuss today.
Income From Life
A few years ago insurance giant Aviva (LSE: AV) was yielding 7% or 8%, and that certainly proved to be unsustainable. As the company struggled to turn performance around and catch up with runaway rivals such as Legal & General and Prudential, the dividend was an inevitable victim. Today, it yields just 3.93%. Aviva is the most disappointing stock in my portfolio, suffering endless false starts.
It’s making steady progress towards becoming a leaner, meaner business, and appears to have integrated Friends Life reasonably smoothly. Half-year profits rose 9% to ÂŁ1.17bn, allowing management to hike its interim dividend by a progressive 15% to 6.75p. Charles Stanley recently described Aviva as “too cheap to ignore” at a forecast eight times earnings per share for 2017, and set to yield 6.5%. The future looks brighter for Aviva, but where have I heard that before?
Smoke Signals
British American Tobacco (LSE: BATS) is seen as one of the most solid dividend stocks on the FTSE 100 but it certainly isn’t spectacular, currently yielding 3.93%. Top investors such as Neil Woodford are addicted to its dependably smooth income, as smokers stick to their habit through good times and bad. I am more wary, given the successful anti-smoking campaigns in the West. Emerging markets now account for 70% of sales but smoking could also fall there as populations become richer and better educated.
The emerging market currency slump has hit British American Tobacco’s revenues when converted into sterling, although its strategy of cutting costs and focusing on premium brands has limited the damage. It is also seizing share as volumes fall. The interim dividend was up a steady 4% and should remain dependable but I am still wary of investing in what is ultimately a dying product.
United Stands Up
Stocks like water company United Utilities (LSE: UU) aren’t supposed to shoot the lights out, but it is up 65% over five years, and 17% over the last 12 months. It still yields a healthy 3.89% although at 18.64 times earnings it can no longer be described as cheap.
Ofwat’s recently-announced five-year framework, which sets out how much water companies can charge, gives investors an unusually clear view of the future. United Utilities plans to increases dividend by at least RPI inflation until 2020, down from RPI +2% in the previous five years, but that should still be enough to whet most income investors’ appetites.
Setting Standards
Standard Life (LSE: SL) has been hit by the recent FTSE 100 sell-off, falling 13% in three months. That has helped the yield, which is now a tempting 4.28%. The valuation is alarmingly expensive, however, at more than 25 times earnings.
Standard Life has evolved from a traditional life insurer to a fee-based asset manager and has benefited from changing pension fashions, such as the move away from final salary schemes into defined contributions, and the introduction of the government-backed auto-enrolment scheme.
Today’s turbulent markets may harm net inflows but it is well-placed to withstand the volatility. Management recently lifted the interim dividend by 7.5% to 6.02p, a progressive move but that pricey valuation still worries me.