With the FTSE 100 so weak at the moment, the times are ripe for picking up some solid dividend-paying stocks and laying them down for the long run. In fact, there are more than a few great companies offering yields of 5-6% or even more right now, and that’s a great annual income to lock in if you can.
But you can possibly do even better by looking for what I reckon is the most important characteristic of a dividend-paying company, and that’s a progressive dividend policy — a 5% yield today is fine, but if it doesn’t grow in the coming years then it will easily be beaten by a progressive dividend offering less at the outset.
Unhealthy products, healthy cash
British American Tobacco (LSE: BATS) is a company whose dividend policy I like the look of. Last year it provided a yield of 4.1%, which is a pretty good level — not up with the highest, but better than average. But the important thing is that it was 4% higher than the previous year, and that in turn was 5.6% up on the year before. And forecasts suggest at least two more years of inflation-busting rises, with yields of 4.1% and 4.3% on a share price of 3,825p.
In short, British American’s dividend is rising at double the rate of inflation and more, in line with the firm’s “commitment to growing shareholder returns” in the words of chairman Richard Burrows at interim time.
You might worry about the tobacco market drying up (and you might have ethical concerns, but that’s for you to decide). But there still seems to be a good bit of growth in the more upmarket brands, as an increasingly affluent developing world looks to premium consumer brands.
Profit from booze, too
Alcoholic beverages generate plenty of cash too, as a look at Diageo (LSE: DGE) and its dividends will attest. Diageo only offers a dividend yield of around 3.1%, which is close to the FTSE average, but for the past three years it has been growing at 9% per year! Analysts expect that rate of growth to slow a little to around 3.5% for the current year followed by 6% next, but with UK inflation standing at around, well, zero percent at the moment, those are entirely real gains.
The thing is, while yields of only a little over 3% can be easily beaten right now, what you’re doing is securing potentially much higher future yields compared to your actual buy price today — and those who bought at the start of the 2010-11 year should be on for an effective yield of 5.5% on their original purchase price, steadily rising in future years.
Squeaky clean insurance
But if you don’t fancy investing in booze and fags, they don’t come much ethically cleaner than Prudential (LSE: PRU), a company most definitely named after its management style. You might not think the 2.5% to 2.6% dividend yield is anything to shout about. But I reckon dividends from Prudential could be one of the best cash streams there is for long-term income investors. It’s mainly for the same old reason that they’re rising significantly faster than inflation, but also because they are so well covered — the Pru keeps its dividends covered around 2.5 times by earnings.
The 36.93p that gave us last year’s 2.5% yield was 10% higher than a year previously, and there’s a 7.7% jump forecast for this year followed by 9.7% next year, all made possible by year after year of double-digit earnings growth.
Prudential’s share price has put on 138% over the past five years too, to 1,510p, and those who invested at the start of 2010 should be enjoying an effective 6.2% yield this year on their original purchase price, on top of their share price gain