High Yield Stocks For Investors Looking For Income Options

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Includes: CPYYF, EVRZF, GSK, ICAGY, IMBBY, MFGP, PSMMF, RDS.A, RDS.B, SLFPY, VOD
by: Stockopedia
Summary

UK dividend payouts came within touching distance of £100 billion last year.

Overall, the record £99.8 billion total payout was up by 5.1 percent on 2017.

Encouragingly, there was uplift right across the market, with nine of the 10 main industry sectors seeing dividend growth in 2018.

UK dividend payouts came within touching distance of £100 billion last year. At a time when many of us were trying to brave out the weak momentum that was pummelling prices across the board, payouts from income stocks actually stayed solid.

Overall, the record £99.8 billion total payout was up by 5.1 percent on 2017, according to Link Asset Services, which tracks UK dividends. That performance was driven by robust earnings growth, some special payouts that beat expectations and the effects of a fall in the value of sterling (which catalysed dividends paid in foreign currencies).

So where were the big dividend stories?

Encouragingly, there was uplift right across the market, with nine of the 10 main industry sectors seeing dividend growth in 2018. But there were some notable cases...

Over the past 18 months it's been pretty clear that several large mining stocks have been riding a wave of stronger commodity prices. At first, this manifested in some big wins for value investors - with bargain-basement miners rebounding from cyclical lows.

From 2017 onwards, those improving conditions fed through to dividends. There has been bumper payout growth from the likes of BHP (NYSE:BHP), Rio Tinto (NYSE:RIO) and Anglo American (OTCPK:AAUKY) - which in the past have been some of the biggest dividend payers in the market. And according to the latest stats, mining was the sector that contributed most to dividend payout growth last year.

Banking stocks also did well in 2018. While it didn't add much to the total, Royal Bank of Scotland (NYSE:RBS) finally reinstated a modest 2p payout during the year. It's quite something to think that back in 2007, shortly before its near-collapse, RBS paid a whacking total dividend of 278.02p.

Another stock offering mixed news last year was British American Tobacco (NYSE:BTI). On the upside, it unleashed a massive dividend hike - up around 97% on 2017 when the fourth and final quarterly payment is made in February this year. But on the downside for BATS shareholders is that the value of the group has broadly halved over the past year, down from £113 billion to £54.5 billion. That dividend hike may well have been welcomed by holders, but will that collapse in value be a longer term cause for concern?

Looking ahead to 2019, Link is forecasting that dividends (excluding special payouts) will grow by 5.3 percent to £101.1 billion in 2019. Again, the year-on-year figures will be boosted by the impact of lower sterling.

Ways of diversifying a high yield strategy

While the market-wide slide in prices last year was unforgiving, one consequence was that it drove up yields and made dividend stocks appear even more appealing.

The trouble, of course, is that with high yield comes the increased risk of being lulled into a dividend trap (where the yield masks the fact that the payout is probably going to get cut). So it's important to consider what a high yield really says about a stock, and to think about the investment merits of companies on a case-by-case basis.

Where to start?

One of the most famous high yield strategies is the blue-chip focused Dividend Dogs strategy.

The original idea of Dividend Dogs was to scoop up the highest yielding shares and then refresh the portfolio each year. It has its detractors - and some have sought to improve on this strategy over the years - but the underlying philosophy remains popular. While it's a simple approach, it does run the risk of being over-exposed to just a few very high yield sectors.

To counter this, I've used this famous strategy to find the highest yielding stocks from each of the 10 main industry sectors across the FTSE 100. This simple sector diversification is similar to the way Ed Croft constructs his StockRanks-driven NAPs portfolio.

While sector diversification won't grab you the very highest yields in the blue-chip index, the idea is it's less likely to leave you over-exposed to just a few sectors either. This is important, because as dividend junkies will know, by chasing high yield there's a tacit acceptance in the Dividend Dogs strategy that some of the stocks it picks up may well be unloved by the market - so it can be worth taking diversification seriously.

So what options does it offer right now? Here are the current highest yielders across the main sectors in the FTSE 100:

Name

Mkt Cap £m

Yield pc

Yield pc 5y Avg

Div Cover

Div Gwth Streak

Sector

EVRAZ (OTC:EVRZF)

6,837

13.3

1.6

1.5

-

Basic Materials

Persimmon (OTCPK:PSMMF)

7,482

10.0

1.8

1.1

1

Consumer Cyclicals

Vodafone (NASDAQ:VOD)

36,190

9.6

6.3

-0.36

2

Telecoms

Standard Life Aberdeen (OTCPK:SLFPY)

6,528

9.5

5.9

0.7

3

Financials

Centrica (OTCPK:CPYYF)

7,699

8.9

5.7

0.8

-

Utilities

Imperial Brands (OTCQX:IMBBY)

22,593

8.0

5.0

0.8

9

Consumer Defensives

Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B)

182,228

6.4

6.7

1.5

-

Energy

GlaxoSmithKline (NYSE:GSK)

71,290

5.6

5.4

0.7

-

Healthcare

International Consolidated Airlines (OTCPK:ICAGY)

12,356

5.4

1.9

3.4

2

Industrials

Micro Focus International (NYSE:MFGP)

6,066

4.8

3.3

1.9

4

Technology

The results of this strategy screen tally with what the latest dividend data is saying. For a start, yields on equities have been rising. Certainly, most of these stocks are currently yielding way ahead of their five-year averages. Evraz, the miner, takes top spot with a yield of 13.3 percent, but groups like Persimmon, Standard Life Aberdeen, Vodafone and Centrica are at or above 9 percent, which has been unusual for this strategy in recent years.

Importantly, there are concerns. Companies like Standard Life Aberdeen, Vodafone, Centrica, Imperial Brands and Micro Focus had a rough ride in 2018. While this strategy assumes that battered blue chips often recover, hard questions are being asked of groups like Vodafone and whether their reputations for robust dividend payouts can continue over the medium term.

As always the quest for income investors is to strike a balance between high yield and dependable payouts that aren't at risk of being cut. At the intersection of those two factors is the issue of company quality and the ability for management to keep payouts intact. High yields are set to be a feature of the market in 2019, which is good news for investors faced with market volatility. But avoiding dividend traps by checking the credibility of those yields is as important as ever.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.