There are currently 25 stocks in the FTSE 100 that support dividend yields of more than 5%. However, there’s more to picking dividend stocks than just choosing the ones with the highest yields. We need to be sure these companies can maintain their dividend commitments.
A sudden dividend cut can lead to a sharp decline in the share price, which can destroy the wealth created by years of income payments in just a few seconds. As such, sticking with high-quality dividend stocks is essential if you’re looking to build a sizable nest egg in the long run.
Market leader
One of the best income stocks in the FTSE 100 today is Admiral (LSE: ADM). The insurance giant has been one of the UK’s largest sector organisations for decades. During this period, the company has accumulated an enormous amount of data, which it uses to price risks correctly and make an attractive return on its insurance contracts.
The company has recently been using this experience to expand into other markets. It’s grown its home and travel insurance divisions as well as developing a handful of overseas operations. Indeed, the company has branched out into the US auto insurance market and Italian, Spanish and French markets.
This international business has been loss-making for the past few years, but in the next year or two, it looks as if this is going to start contributing to the bottom line.
Management is also using Admiral’s knowledge and data trove to develop a personal loans arm. Once again, this business is still in its infancy, but it’s growing fast. If Admiral can replicate its insurance market success in the loans sector, this division could become a significant contributor to the bottom line over the long term.
Dividend growth
All of the above seems to suggest the company’s dividend has a bright future. Over the past decade, Admiral has paid out around 100% of its earnings every year to investors via dividends. The company can do this because it reinsures most of its risks. As a result, the firm doesn’t have to hold as much capital as its peers. That’s good news from an income perspective.
The annual dividend yield is a combination of regular and special distributions, which gives management some flexibility when it comes to setting the level of the payout. The company can pay out as much or as little as it wants without having to cut the regular dividend, which the market can interpret as a sign of distress.
At the time of writing, the stock supports a dividend yield of 5.4%. Also, the shares are dealing at a price-to-earnings (P/E) ratio of 18.1. That appears high compared to the market average of 13.1.
However, considering Admiral’s competitive advantages, international expansion, and dividend history, the stock seems to deserve this premium valuation.