These are glory days for income seekers with a host of FTSE 100 big-name stocks offering yields of 5%, 6%, 7% or even more. With the average easy-access savings account now paying just 0.47%, according to Moneyfacts, they offer an invaluable income stream.
The difference between cash and a dividend is that the latter isn’t guaranteed, so you need to check how sustainable the payouts are. HSBC Holdings (LSE: HSBA) and GlaxoSmithKline (LSE: GSK) both offer amazing yields today, but will you still love them tomorrow?
Hold on
HSBC was seen as a great way to play China and emerging markets, until Asia hit the skids. This left HSBC high and dry and the last five years have been pretty torrid for investors, with the share price down 35% in that time. There ‘s been no sign of a reprieve lately, but the volatile share price has driven the yield, with the stock now offering an incredible income of 7.97%.
An 18% year-on-year drop in first-quarter profits to $5.4bn suggests there’s no easy road back for the struggling bank, as up-and-down stock markets hit its equity business, while falling oil and commodity prices drive rising impairments among clients in the sector.
Chief executive Stuart Gulliver is edging the business away from volatile investment banking to focus on UK retail and Hong Kong and Chinese commercial banking. The restructuring will take time and earnings per share (EPS) are forecast to drop 9% this year, but far-sighted investors can look forward to a reversal in 2017, with a forecast 8% rise. Dividend cover is still 1.3 times and although it has been shrinking lately the payout looks safe for now, supported by a strong balance sheet. Now we just hope that Gulliver’s travels prove rewarding.
Cover required
Pharmaceutical giant GlaxoSmithKline has long been seen as one of the most stable dividend payers on the FTSE 100 but lately its share price performance has been rocky. The income stream, however, has been as reliable as ever, and the stock currently yields a generous 5.66%. When people moan about falling savings rates I want to shout from the rooftops about income stocks like these, despite the capital risk.
Dividend cover has slipped to 0.9, which is starting to look a little thin. The last time Glaxo hiked the dividend was in 2014, when it raised it from 78p to 80p a share. It has stuck at that level since and will continue to do so, with management pledging to pay an annual ordinary dividend of 80p in both 2016 and 2017. So that gives you some security in the near term.
Glaxo needs to generate higher earnings to sustain the dividend beyond that, which is a challenge with EPS falling each of the last four years, including a 21% drop most recently in 2015. However, the outlook is more positive, with EPS forecast to rise by 16% in 2016 and 5% next year. Management is wisely looking to reduce its dependence on blockbuster drugs by diversifying into vaccines and consumer health. If this strategy proves a success, investors can finally look forward to further dividend progression. Shame it’s so expensive at 19 times earnings, which makes HSBC look cheap at 9.72 times.
Neither HSBC nor Glaxo are surefire dividend bets, but as the hunt for yield intensifies, the long-term rewards far outweigh the risks.