Stock markets may be volatile and savers are frustrated by record low interest rates but it’s worth remembering that we live in a golden age for dividend income. A string of top FTSE 100 names are yielding between 4% and 6% and investors can take their pick. Here’s my dream team.
That Petrol Emotion
Troubled oil major BP (LSE: BP) wouldn’t belong to anybody’s growth dream team. It’s down 25% over the past year, but the tumbling oil price isn’t the only reason for its blow-off. At today’s 360p it still trades at roughly half the 700p it touched 10 years ago, in those far-flung days before the financial crisis, Gulf of Mexico disaster, controversial Rosneft tie-up and oil price plunge.
Poor, beleaguered investors in BP even saw their income disappear after the Deepwater tragedy but now it’s back, with the stock yielding a dizzying 7.44%. Many have questioned the sustainability of BP’s dividend but chief executive Bob Dudley hasn’t wilted. In February, he assured markets that he was happy to fund payouts out of debt, and was prepared to lift the company’s leverage ratio as high as 25%, up from 21.6% at year-end. At the time, the oil price stood at $31 a barrel. Today it hovers around $44, as oil markets get over their post-Doha disappointment.
BP needs oil at $60 a barrel to make its sums add up and that number may be tantalisingly close as oil industry cost slashing hits production. The Saudi endgame is approaching as expensive rivals are squeezed out, and the next oil price shock could be upwards. It will be a close run thing, but the odds are that BP’s dividend will survive, giving brave investors an opportunity to lock into that sky-high yield today.
Gridlocked
National Grid (LSE: NG) has long been my favourite utility play and it has continued to fulfil expectations, rising 70% over five years against just 6% for the FTSE 100 as a whole. Growth has been admirably steady, up 27% over three years, 13% over one year and 4% over the last month. That’s a benefit of being a virtual monopoly in a heavily regulated industry.
The yield is another virtue, currently a steady 4.33%, covered 1.4 times. You can find juicier yields in the utilities sector, for example Centrica offers 5.08%, but that has been a comparative share price disaster, falling 27% over five years. National Grid’s low yield is the price of success, and a small price it is indeed.
There’s a bigger price, and that’s the valuation. National Grid trades at a premium 17.33 times earnings. That looks even pricier with forecast earnings per share growth to be just 1% over the next couple of years. It may struggle to transmit another five years of electric share price growth from here, but the dividend looks as solid as a dividend can be.