15 Decent Dividend Picks

Published in Investing on 2 December 2011

Looking for yield? Start here.

Decent dividend-paying shares are always popular with income-seeking investors.

And that's because not only does research repeatedly highlight that dividends comprise a fairly hefty chunk of long-term total returns, but also because many investors rely on those dividends for income.

As I wrote a couple of weeks ago, for instance, one popular income-producing portfolio here at The Motley Fool has delivered £40,823 in dividends over eleven years, from an initial £75,000 investment.

And its capital value, meanwhile -- without dividend reinvestment -- has risen to £114,218, an increase of some 52% on the original £75,000 purchase cost.

Perilous picks

That said, finding those long-term dividend-paying shares can be tricky.

Aim for too low a yield, for instance, and you'll wind up receiving a dividend that's either close to the FTSE All-Share average, or below it. At which point, you may as well just buy a low-cost tracker, and get some diversification into the bargain.

Aim for too high a yield, and you run the risk of latching on to a share that's destined to either cut its dividend, or implode altogether. Some of the FTSE's highest yields at the moment, for example, are shares with precisely such question marks over them: MAN Group (LSE: EMG), Cable & Wireless Communications (LSE: CWC) and Home Retail Group (LSE: HOME) all have yields of over 10% or higher.

And there's also the issue of sustainability to consider. A share might offer a decent yield now -- but will it last? Is the underlying business, in short, one with regular predictable earnings, and ideally earnings that are poised to grow?

No wonder, then, that some of our most popular discussion boards here at the Motley Fool are devoted to precisely these questions.

Poised to pay

Helpfully, analysts at Morgan Stanley have run a screen that asks such questions, and they reckon that the fifteen companies below offer a high and secure yield.

Decent dividends, in short, and dividends that look to be sustainable and secure in the medium to long term.

So which companies made the grade? Take a look at the table below:

CompanyCurrent P/EForecast yield
Admiral (LSE: ADM)11.29.0%
AstraZeneca (LSE: AZN)6.36.5%
BAE Systems (LSE: BA)6.87.6%
British American Tobacco (LSE: BATS)15.24.9%
British Land (LSE: BLND)16.95.9%
Centrica (LSE: CNA)11.75.7%
GlaxoSmithKline (LSE: GSK)12.55.4%
Imperial Tobacco (LSE: IMT)11.64.7%
Legal & General (LSE: LGEN)8.26.9%
Marks & Spencer (LSE: MKS)9.65.9%
Royal Dutch Shell (LSE: RDSB)8.35.3%
SSE (LSE: SSE)11.76.7%
Severn Trent (LSE: SVT)18.15.0%
United Utilities (LSE: UU)17.55.7%
Vodafone (LSE: VOD)10.97.9%

Start here

Looking at the list, I see plenty of the 'usual suspects' -- companies regularly favoured by income investors on our discussion boards. Businesses such as British American Tobacco, GlaxoSmithKline, SSE, Vodafone, for instance. And it's difficult to quibble with such choices.

That said, some of the picks are rather pricey, and I'd be tempted to look for a cheaper entry point, and buy on a dip. Severn Trent, for instance, has a P/E of over 18. British American Tobacco's P/E of around 15 isn't cheap, either, although from a dividend perspective, the company has undeniably done the business over the past few years.

Then there's the question of sustainability. United Utilities, for one, has a somewhat erratic dividend history, likewise Marks & Spencer.

All in all, though, it’s a list with a lot of promise, and a good starting point for further research. By my reckoning, the average yield if you bought the lot (accepting, in the process, a portfolio concentrated around utilities, pharmaceutical and insurance) is a chunky 6.2%.

Try getting that from a savings account!

> Searching for yet more share ideas? Enjoy our latest report -- 3 Shares We're Ready To Tip -- while it's still free and available!

More from Malcolm Wheatley:

> Malcolm owns shares in AstraZeneca, BAE Systems, GlaxoSmithKline, and Marks & Spencer. The Motley Fool owns shares in Admiral, AstraZeneca, GlaxoSmithKline and SSE.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

theredflag 02 Dec 2011 , 5:49pm

Legal and General yield currently showing as 4.7%.

http://www.topyields.nl/Top-dividend-yields-of-FTSE100.php

Must be expecting a large dividend increase?

MDW1954 02 Dec 2011 , 6:37pm

6.76p for 2012, versus 5.08p historic on the website you cite.

Malcolm (author)

ANuvver 02 Dec 2011 , 6:42pm

I use that site too - find it pretty reliable.
Sorry to open up the old can of Vodaworms, but...

7.9% forecast yield?
Only including the one-off Verizon special due in February. I could be wrong, but I thought the deadline for buying into that has gone?

Otherwise, it's still a pretty decent 5.3%, but still.

If today's news on spectrum buying is anything to go by, it looks like VZN is determined not to be in a surplus position so as to have to repeat the payout...

hairlet 02 Dec 2011 , 6:43pm

A notable absence of Aviva (AV.) despite many many articles on TMF singing its praises. The forecast dividend is high enough so it must have been left off the list due to its sustainability...

ANuvver 02 Dec 2011 , 6:46pm

Just seen Malcolm's reply.

I don't mind working on historic. That way the surprises tend to be good ones...

ANuvver 02 Dec 2011 , 6:49pm

hairlet:

My experience with AV is that it's essentially functioning as a europanicometer. More volatile than most of my growth stuff!

QuantumDealer 02 Dec 2011 , 7:39pm

It is a shame that dividend cover was included in the table too. Agree on good point made re: VOD and the exceptional dividend, which IS ex-div already.

AZN has to be the safest dividend on the list...a relatively low payout ratio, zero debt & cash generative. Low P/E is attractive too in spite of patent/pipeline outlook.

jadeplant 02 Dec 2011 , 8:11pm

Yields of over 10% or higher, eh? ;)

MDW1954 02 Dec 2011 , 10:05pm

Hello jadeplant,

Yup. You can't stress something enough. :-)

Malcolm (author)

theredflag 03 Dec 2011 , 8:56am

@MDW1954

Thanks. Thought it might be a case of historic vs forecast.

As ANuvver points out, historic is OK for me too. But the posited increase looks nice!

ANuvver 03 Dec 2011 , 12:09pm

jadeplant:

Compound emphasis?

MunroMan 03 Dec 2011 , 5:03pm

I think the placing of Admiral a the top of the list tells us all we needed to know.

It is a shame the author did not qualify the list rather than just swallow the line from the investment bank.

jadeplant 03 Dec 2011 , 7:54pm

ANuvver:

Redundancy actually, but note the smiley!

MDW1954 03 Dec 2011 , 9:20pm

LordEssex,

The list is in alphabetical order, so a name beginning with "Ad" is fairly likely to be at or close to the top of the list.

If you read the article closely, you'll see that I queried four of the picks. And described four others as "difficult to quibble with".

I think the fact that I did comment on over half of the list shows that I didn't just "swallow the line from the investment bank".

Foolishly yours,

Malcolm

salmo365 05 Dec 2011 , 1:14pm

The problem with Astrazeneca & Glaxo is the upcomming patent cliff.

The both have big earning drugs with very limited patent life left.

hanzando 05 Dec 2011 , 9:05pm

Would be useful to see a similar trawl done on the FTSE 250

salmo365 06 Dec 2011 , 9:35am

I'm more interested right now in US equities. 5 minutes on Bloomberg and I found 32 stocks in the S&P500 paying 5% (current not forecast). The Russell 2000 Index now doubt has loads more.

The FTSE 250 has 29 companies with a yield over 5%

BilboBlogs 06 Dec 2011 , 10:12pm

Any views on using iShares UK dividend 50 (IUKD) for a simple diversified access to high yielding FT350 shares ?
Seems reasonable TER (0.4%) and physical replicated.
... no I don't work for iShares but thinking of diversifying out of some of those high P/E shares I own on the list.

RobinnBanks 07 Dec 2011 , 1:12am

Admiral seems to be going down with its ship according to the ghastly stories on Money Mail of refusing to payout to a woman who was robbed at knife and gunpoint.

RobinnBanks 07 Dec 2011 , 1:36am


Here is the link:

http://www.thisismoney.co.uk/money/cars/article-2056291/Zoe-B uckler-robbed-gunpoint-car-insurer-Admiral-refuses-pay.html

The share price is well down after a profits warning too.

ocahan 07 Dec 2011 , 11:25pm

I have currently 30k invested in uk and US trackers and have invested 10k in high yielders since Aug,
Should i convert this 10k using the new isa allowance 2011/12 or use it to invest in anothe tranche of high yielders ?

ANuvver 09 Dec 2011 , 12:06am

ocahan:

Depends on your circs.

Unless you're a high-rate taxpayer, the only benefits of ISA wrapping are shelter from capital gains when you sell and shelter on income-paying (as opposed to dividend-paying) investments - typically bonds or property REITs.

Dividends have the basic-rate 10% scraped off before they reach you, whether in an ISA or not.

So if you have a certain amount allocated to bonds, that should be first in line for ISA parking. That way, the returns don't join your other income and get hit for basic 20%, etc. In fact, you don't even have to report what you hold in an ISA on your tax return.

There's nothing wrong with gradually "bed & ISA"ing everything, of course, in preparation for the day when you may want to sell and capital gain may be an issue.

I'm not a qualified advisor, but I think what I've suggested here is reasonable and uncontroversial. Best of luck.

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