Dividend cover on high yielding stocks looks thin for 2016

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

“Investors looking at high yielding stocks for 2016 must look at dividend cover as well as the headline forecast yield, because some of the juiciest-looking forecast dividend yields could just prove too good to be true, says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 is expected to yield around 4% for 2016, based on aggregate consensus analysts forecast, and the top 10 yielding stocks are all expected to yield 6% or more.

“Ideally, you want to see earnings cover the dividend pay-out by a multiple of two – and see that as an average over the last eight years and the following two. 

“When it comes to the fattest yields from the FTSE 100 right now, cover is skinnier than ideal with only 1 of the top 10 having dividend cover over two:

  Dividend yield, 2016E Dividend cover 
BHP Billiton 10.90% 0.4 x
Rio Tinto 7.90% 1.0 x
Royal Dutch Shell 7.80% 1.0 x
BP 7.20% 0.9 x
Pearson 7.00% 1.2 x
Aberdeen Asset Mgt. 6.50% 1.2 x
HBSC 6.40% 1.5 x
SSE 6.40% 1.3 x
Carnival 6.20% 2.7 x
GlaxoSmithKline 6.20% 1.0 x

Only Carnival (LSE:CCL) offers earnings cover that exceeds 2.5 times, although SSE (LSE:SSE) at 1.3 times has the benefit of being a stodgy utility.“Of the 10 forecast fattest dividend yields for 2016:

  • The oils, BP (LSE:BP) and Shell (LSE:RDSB) around 1.0 times should get away with it if oil rebounds – although that’s a big ‘if’ at the moment. They can also pay dividends from their own resources while they wait for oil to rally as they have relatively little debt and are cutting both costs and investment but care is needed here. BP has cut its dividend twice since 1990, though Shell has not done so since at least 1945.
  • HSBC (LSE:HSBA) at 1.5 times, Pearson (LSE:PSON) at 1.2 times and Aberdeen (LSE:ADN) at 1.2 times must all be watched very carefully
  • The ones which on paper look to be at greatest risk are BHP Billiton (LSE:BLT) at 0.4 times and Rio Tinto (LSE:RIO) and GlaxoSmithKline (LSE:GSK) at 1.0 times, especially as miners like Glencore (LSE:GLEN) and Anglo American (LSE:AAL) have already slashed their pay-outs.

“As such, portfolio-builders may be better off focusing on stocks which offer dividend yields of 3% to 4% that have good cover and are capable of increasing their pay-outs over time, rather than those where there is a yield of 6%, 7% or more where cover is thin.”

Source: AJ Bell / Digital Look, analyst consensus estimates

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.