There is no shortage of high-quality dividend stocks across the FTSE 100, but there are two, in particular, I’d like to draw your attention to today, Schroders (LSE: SDRC) and Diageo (LSE: DGE). Here’s why I believe both stocks have strong ISA potential.
5% yield
Schroders is a £9bn market cap investment manager, headquartered right here in London. The group offers both asset management and wealth management solutions, and has operations across 20 global locations. Not all investors realise this, but Schroders actually offers two types of shares: voting (ticker SDR) and non-voting (ticker SDRC). It’s the non-voting shares that offer particular appeal, in my opinion, as these shares trade at a lower valuation and offer a higher yield.
From a dividend investing point of view, Schroders ticks many boxes. First, the stock has a strong yield. For 2017, the investment manager declared a dividend of 113p per share, which equates to a trailing yield of 5% on the non-voting shares.
Second, dividend coverage is strong. For 2017, the company generated basic earnings per share before exceptional items of 227p, giving a coverage ratio of 2. That level of coverage indicates that the company can comfortably afford to pay its dividend and that a cut is not likely.
Third, the company has an excellent dividend track record. Unlike many financial institutions, Schroders did not cut its dividend during the financial crisis. Furthermore, dividend growth has been excellent in recent years. The group has now recorded eight consecutive dividend increases, with the payout being increased 45% over the last three years alone.
Yet despite Schroders’ bright dividend prospects, its shares have not escaped the recent FTSE 100 sell-off. Back in January, the non-voting shares were changing hands for around 2,700p. Today, they’re trading under 2,300p. At that price, with a 5% yield on offer, I believe the stock has strong ISA appeal.
Exceptionally rare
“Wake me up when Diageo trades on 45 times earnings” – Nick Train
Another stock worth looking at right now is alcoholic beverage manufacturer Diageo. The £58bn market cap company is one of the largest alcoholic beverage manufacturers in the world and owns an exceptional portfolio of brands such as Johnnie Walker and Smirnoff. Due to the defensive nature of its business, Diageo is one of the most consistent performers in the FTSE 100, but strong exposure to the world’s emerging markets also adds an exciting growth angle here.
Diageo is a stock that is generally in high demand. For this reason, it often trades at a high valuation along with an underwhelming yield. Yet over the last two months, the shares have trended down from above 2,700p to 2,360p as many investors have rotated out of ‘bond-proxy’-type stocks. Today, the shares can be bought on a forward P/E of 20.5, along with a prospective yield of 2.8%. While that’s clearly no bargain, I think the shares are getting close to the point at which they do offer value.
Indeed, according to top UK portfolio manager Nick Train, exceptionally rare companies that can compound returns steadily for decades such as Diageo and Unilever can “readily justify P/Es of 30, 40 or more.” Train believes that a P/E of 20 and thus an earnings yield of 5% is an “attractive proposition for serious investors.” With that in mind, now might be a good time to take a look at the stock for your ISA.