If your portfolio has had a shaky start to 2016, then you’re not alone. I suspect most investors have seen their portfolios taking some knocks since the New Year. I know mine has.
Big dividend stocks such as Vodafone Group (LSE: VOD) and BAE Systems (LSE: BA) can be a great way to protect your portfolio from painful losses. But are these payouts safe? In this article I’ll take a closer look and will also consider the 8.8% yield on offer from Aberdeen Asset Management (LSE: ADN).
Vodafone Group
As promised, Vodafone has maintained its 11p per share dividend since it sold its stake in Verizon Wireless. Although this payout hasn’t been covered by earnings, it has been protected by the group’s strong balance sheet and relatively low debt levels.
The firm’s shares yield a tasty 5.3% and the board’s decision to take a long-term view looks like it may pay off. Vodafone’s latest interim results revealed a 2.8% rise in organic revenue and a 1.7% rise in reported operating profit.
Although it’s early days, Vodafone’s decision to invest heavily in network upgrades and acquisitions after selling its share of Verizon Wireless is starting to deliver results. The group has maintained the confidence of the City. With the shares offering a 5.3% yield and trading just below their book value, Vodafone could be a good income buy.
BAE Systems
With oil below $30 per barrel, you might expect BAE’s third-largest customer, Saudi Arabia, to cut back on defence expenditure. Yet this doesn’t look likely at the moment.
Saudi Arabia is currently fighting a war in Yemen. Neighbouring Iraq, Iran and Syria all provide other reasons for the Saudis to continue investing in their armed forces. Recent press reports suggest that Saudi defence spending will account for $57bn, or 25%, of the Kingdom’s 2016 budget. I don’t think BAE will face cutbacks in the near future.
Meanwhile, BAE’s two largest customers, the UK and the USA, also appear intent on maintaining or increasing defence expenditure. BAE has outperformed the FTSE 100 over the last six months, climbing by 6% while the index has fallen by 14%.
I’m not surprised. I’d expect BAE to show further defensive strength over the coming months. The stock’s forecast yield of 4.1% should be safe for the foreseeable future.
Aberdeen Asset Management
I admit that big faller Aberdeen Asset Management is a bit riskier than BAE and Vodafone. But with a potentially affordable forecast yield of 8.8%, this risk might be worth taking.
Aberdeen’s share price has fallen by 45% over the last year, due to customer withdrawals and the group’s heavy exposure to slumping emerging markets. However, profits have held up quite well.
Earnings per share fell by 15% to 21p last year, but are expected to climb 9% to 23p in 2016. That puts the stock on a forecast P/E of less than 10 and is also enough to cover (just) a forecast dividend of 19.9p per share.
I’d prefer to see a higher level of cover, but as things stand it does seem to be affordable. If Aberdeen’s earnings continue to recover then this could prove a profitable buy. There’s a risk that trading conditions will worsen, however, so further research may be wise.