Dividend stocks under pressure 

Many large corporations are anxious about paying out dividends until the outlook for the global economy becomes clearer. However, there are still some dividend stocks in the FTSE 100 that can still afford to pay out high yields sustainably. M&G fits into this category.

M&G’s dividend yield currently stands at 7%, placing it in the top 25% of dividend stock payers in the FTSE 100. The dividend payments M&G is providing are also well covered by the earnings generated per share, suggesting that the company has plenty of earnings to spare after paying out its dividend. This adds a sense of security to investors in the knowledge that M&G can continue to provide its current yield securely. Additionally, analysts forecast the dividend of the stock to get back to previous levels of 10% by the end of 2020. 

Don’t put all your eggs in one basket 

Undoubtedly, to predict the outlook of this dividend stock is relatively challenging. The current volatility in the stock market will continue in the short-term as the global economy struggles to get to grips with the coronavirus. In addition, the stock only recently started trading in the FTSE 100 last year, which raises questions as to how stable the company is going to be for the future, as making judgements on the stability of a company  can always be risky especially when it has been newly listed in the stock market.

Nevertheless, M&G has not been placing all its eggs in one basket. The asset managers have been diversifying by branching out into the wealth management sector, as recently shown by having acquired the Ascentric platform from Royal London. The purchase brings £14bn of assets under management, as well as advisors and revenue to M&G from alternative sources. The purchase will help to accelerate the ability of M&G to provide a wider range of investment solutions to more customers, through the service offer they favour. 

M&G has shown to be a solid dividend stock which can manage to provide a dividend yield of 7% while having plenty of earnings to spare. Additionally, the stock seems to be in a solid financial position, prepared for growth via acquisitions. The stock is currently trading at a 30% discount due to the stock market crash and I reckon this share will continue to provide a market-beating dividend yield all while showcasing a solid financial position. 

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Alan Gurung has no position in any share mentioned. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why Shell is one of the best UK stocks to buy now

Additionally, it’s worth noting that Shell does a lot more than simply pump oil and gas out of the ground. It owns refineries, chemical plants, distribution networks, and is a world-class energy trader. I believe many of these engineering and infrastructure assets will remain relevant in an ever-changing future, especially if liquid petroleum gas or hydrogen becomes more widely used as transport fuels.

The Shell stock price has fallen drastically during this pandemic period, largely due to the bombing of oil prices in February. Shell followed BP and dropped its oil price forecasts for the next few years, leading to a £12bn-18bn reduction in its June quarter results, placing the share price at low levels of 1,250p at the time of writing.

One major opportunity arising out of the recent troubles with oil is that it may act as a catalyst to quicken efforts towards green energy. However, although the world needs to address climate change urgently, the reality is that billions of people all over the world still rely on fossil fuels through transportation, electricity, and the raw materials needed in manufacturing. Considering the dramatic fall in the share price and the necessary use of fossil fuels in people’s lives, it all adds further reason to why Shell may be one of the best UK stocks to buy now before it starts rallying once the pandemic starts to settle.

Dividend cut could help Shell shares

Shell’s share price fell when the group cut its dividend by 65% in April. This was the first cut in dividends by the company since the Second World War. However, I am confident that it was the appropriate thing to do.

The annual £11bn dividend had become a burden that limited its ability to evolve. With this cut, Shell aims to strengthen its financial position and cut costs during a very difficult time. I believe shareholders will benefit from this decision over the longer term.

With the shares trading at around 1,250p and a personal optimistic outlook on the pandemic steadying in the coming months, I rate Shell as one of the best UK stock to buy now.

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Alan Gurung owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Sector under pressure following stock market crash

On face value, the year-to-date performance of the stock has taken a dramatic tumble. The share price of RBS has fallen by around 50%. Similarly, during this time the FTSE 100 has also slashed down as far as 34% to 5,000.

RBS is also having to deal with low-interest rates. In the first quarter, overall revenues declined 1.6%. Revenues may continue to stagnate considering that the Bank of England maintained its key rate at the lowest level of 0.1%.

However, despite these pressures, RBS offers less risk than many other firms within its sector. The bank has relatively limited exposure to credit card lending, as RBS’s primary source of funding comes from customer deposits.

Margin of safety

Throughout the process of a decade, RBS has rebuilt a relatively strong balance sheet, with a reduction in debt from 2013 of £600bn to £260bn in 2020. Before the stock market crash, the bank was set to yield nearly a 10% annual dividend in 2020 and 2021. Although RBS may not be able to reach this level of yield for another year or two, it clearly shows the dividend potential and the balance sheet durability that the RBS holds.

In addition, when comparing Royal Bank of Scotland with other companies within its sector, RBS has become profitable for the past five years, growing earnings by 53.5% per year, exceeding the banking industry average of 27.5%.

Foolish final thought

Naturally, the bank’s share price may experience turbulent volatility in the short term. The economy consensus remains unsure of the longevity of the virus and the significant impact it will have on the UK economy.

One possible outcome is that it could be several years before optimism is regathered in the economy again (there could easily be another stock market crash). The 50% decline in the RBS share price highlights that investor sentiment is fragile.

As the economic fallout of the pandemic becomes clearer over time, this could persist in the short run, but the valuation of the RBS share price could provide long-term investors with the opportunity to buy a high-quality business while it offers a wide margin of safety.

The best way to limit the risk of this investment going wrong, while being able to partake in any potential upside, is to own the stock as part of a diversified portfolio of shares. With the possibility of the stock to reach its prices of before the pandemic of 230 GBX, the investment opportunity of this quality stock, with industry-beating earnings growth rate, could provide for a lucrative opportunity for a long-term investment.

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Alan Gurung owns shares of Royal Bank of Scotland. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.