When markets fall heavily, good dividend stocks really show their value. Short-term dips in the value of your shares seem less important if dividend cash is continuing to flow into your share account.
I’ve been hunting through the FTSE 100 for top quality dividends to consider adding to my portfolio. In today’s article, I’ll consider whether the dividends available from Lloyds Banking Group (LSE: LLOY) and Burberry Group (LSE: BRBY) are enough to make these shares a buy.
Burberry
If you’re an income investor, then I believe that upmarket fashion brand Burberry could be worth considering for your portfolio.
Although Burberry’s forecast dividend yield is fairly average, at 3.1%, this is a high quality payout that seems very unlikely to fall. Over the last five years, Burberry’s dividend has been covered at least 1.5 times by free cash flow every single year. That’s an outstanding record.
Underlying Burberry’s payout is a high quality business. The firm’s operating margin has averaged about 18% over the last five years, while return on capital employed has averaged 32%.
Burberry’s balance sheet has almost no debt and the firm has net cash of £458m. Such a strong financial position means that shareholders don’t need to worry that Burberry will have to cut its dividends in order to meet interest payments if trading slows.
It’s also worth considering Burberry’s record of dividend growth. The shareholder payout has risen by a whopping 1,070% since 2003! Since 2010, the payout has risen from 14p per share to 35.2p per share, a 151% increase.
Although dividend growth does appear to be slowing, Burberry’s focus on a sustainable dividend is very reassuring to me.
In my view, the firm’s track record suggests that dividend growth could accelerate again in the future. In the meantime, I believe that this could be one of the safest dividends in the FTSE 100.
Lloyds Banking Group
As I write, shares in Lloyds are just managing to top 60p and last week they dropped below 60p. A few months ago this seemed hard to imagine. The government was steadily selling its remaining stake in the bank and private investors were looking forward to a discounted share offer later this year. However, the big banking sell-off has put paid to these hopes for the time being.
Lloyds shares have fallen by 18% so far in 2016 and now trade less than 10% above their tangible net asset value of 55p. Lloyds’ balance sheet also looks strong, with a common equity tier 1 ratio — a key regulatory measure — of 13.7%. That’s higher than most of the bank’s UK-listed peers.
What’s interesting to me, as a potential buyer of Lloyds’ stock, is that analysts’ earnings forecasts haven’t fallen in line with the bank’s share price. Forecasts for Lloyds’ 2016 earnings per share have only fallen by 3.8% since December. That doesn’t seem enough to justify a sell-off.
Indeed, based on 2016 forecasts Lloyds now looks an attractive income buy. The bank’s shares trade on a forecast P/E of 8.0 and offer a potential yield of 6.2%. Lloyds could be a strong buy for dividend hunters, in my opinion.