The 3 dividend musketeers: Esure Group plc, Talktalk Telecom Group plc and Phoenix Group Holdings

An old adage in the market is to “sell in May and go away”, but sometimes following adages too strongly can be a fool’s errand. Especially when you look over these three dividend musketeers.

A handsome yielder

A dominant player in the closed life funds sector, Phoenix Group (LSE:PHNX) has once again made a splash on financial newswires. Thankfully, it’s not because of another scandal involving a near-retiree losing most of their pension or savings in a zombie fund. Rather, Phoenix Group appears to lead the race to buy its smaller UK rival, Sun life.

Acquisitions are the name of game for closed life funds like Phoenix Group as it depends on making acquisitions to grow cash generation rather than issuing new policies. And cash generation is ever more important with the introduction of Solvency 2, which imposes stricter capital requirements, ultimately posing a risk to a company’s ability to continue paying out lofty dividends.

Thus, should the Sun life deal go ahead, it would provide a much needed cash injunction to Phoenix Group’s balance sheet. Importantly for us yield hunters, it should help firm up that lofty 6.3% dividend yield.

Making good on old promises

Esure’s (LSE:ESUR) earnings report released, May 5, was positively received by the market as key metrics across the board were higher compared to the same period a year ago.  Gross written premiums were up nearly 16%, gross written motor premiums rose 17% and home premiums grew 8.3%.

However, what investors were really keen on scrutinising was the performance of Esure’s price comparison unit, GOcompare.com. Esure has recently invested heavily in new advertising campaigns focused on money products such as loans, credit cards and current accounts. Fortunately for investors, the price comparison unit didn’t disappoint as income soared 19% when compared to the first quarter of 2015.

It might seem somewhat strange that I’ve called this a ‘dividend musketeer’ given that the company reduced its current annual dividend to 11.5p from 16.8p a year earlier.

However, the bigger picture here is that management is making good on old promises. In March, management announced plans to cut the dividend in order to fund growth in an improving UK motor insurance market. Thus, the increase in gross written motor premiums fully justifies its decision.

Considering that Esure’s current payout ratio is around 70%, investors will be hoping that continued growth in UK motor insurance helps boost earnings and soften the payout ratio. The payout ratio refers to the proportion of earnings paid out as dividends. Usually, a lower payout ratio is preferred as it implies that dividend payments are more sustainable.

And investors have reason to be optimistic as analysts are expecting earnings to grow nearly 16% by 2017. Including the current yield of around 4%, making this dividend musketeer ever more attractive. 

Time to talk about TalkTalk

Despite the hacking scandal hanging over TalkTalk that makes customer acquisition and retention efforts harder, Talktalk has performed strongly in 2016, adding over 17% to its valuation year-to-date. This performance far outstrips the wider FTSE100.

Yet there are more reasons than the strong capital gains YTD to hold onto TalkTalk as many are predicting that, given its shaky reputation and customers pouring out of the exits, it may be ripe for takeover bid from one of its rivals, Vodafone. However, juicy rumours and impressive capital gains aside, the yield of 5.7% remains attractive.