Top 10 FTSE 350 dividend stocks for ISA season

Dividend hunters could be forgiven for feeling a sense of unease over the past year. Supermarket price wars and depressed commodity prices have served to dent the income from traditional dividend stalwarts like Tesco and Centrica. So this ISA season it could be worth looking further afield in the market for high yielding shares that look best placed to sustain their payouts.

Take away the effects of individual special payouts and income growth from the FTSE 100 was a measly 0.7% last year. That's not exactly inspiring for investors who are looking for sustainable income growth from the comparative safety of blue chip stocks.

While the FTSE 100 easily accounts for the lion's share of dividend payouts - 90% of the total last year - its highest yields are concentrated among a handful of sectors like resources, financials and pharma. Broadening the scope to the FTSE 250 could be a useful way of diversifying between sectors and finding other good quality, growing, high yield shares.

Dividend safety

For investors looking to capture high yields, one of the key considerations should be dividend safety. Attractively high yields obviously turn heads. Yet they may also be a warning that the market is losing faith in the story and the dividend could be cut.

One of the most insightful measures of dividend safety is whether the firm in question is likely to be paying more in dividends than it actually earns - something known as dividend cover. It's a ratio that divides earnings per share by dividends per share. Last year Centrica was criticised for its wafer thin dividend cover and was ultimately forced to cut its payout when profits tumbled.

Well known UK investor Jim Slater uses dividend cover as one of his tools for measuring a company’s financial strength. In his book, Beyond the Zulu Principle, he explained: "It is obviously comforting if a company's dividend is two to three time covered. However dividend cover comes more into its own as an investment measure when the cover is very slender. In that event there may be a cut in dividend, with disastrous consequences for the share price."

Screening the FTSE for strong, safe yields

Using the most up to date financial information & forecasts Stockopedia.com created a list of FTSE 350 stocks with the highest "rolling" yields across various sectors with a minimum dividend cover of 1.7x earnings. We have also included each company's StockRank - Stockopedia's overall score that grades each stock's quality, value and momentum between 0 (worst) and 100 (best).

Topping the list are insurance groups Brit and Amlin, followed by mining giants Anglo American and Rio Tinto - despite being an unloved sector, Rio actually increased its dividend in February. Engineering groups Carillion and Amec Foster Wheeler (AMFW) both offer yields of just over 5% that appear to be reasonably well covered by earnings. Among the consumer-focused stocks, it's Sainsbury's, Royal Mail, Dairy Crest and pub group Marston's that have the best covered dividend payouts.

After a rollercoaster ride for some of the market's highest yielding stocks last year, investors looking for sustainable income this ISA season should be prioritising safety, even if it means overlooking some of the very highest yields. Financial strength and the signs of a robust dividend payout should help avoid the very worst dividend traps.

For the more intrepid dividend investors it's always worth diving deeper amongst small cap shares. While the AIM market has had a very bad run since 2000, some of the greatest dividend winners have come from amongst the junior market. Next week we'll be continuing our dividend focus to highlight the highest paying, high quality AIM stocks. Stay tuned and safe Investing.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ed Page Croft of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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About the author

Ben Hobson is Strategies Editor at Stockopedia.com. His background is in business analysis and journalism.

Ben writes regularly on investment strategy performance and screening ideas for  Stockopedia. He is the author of several ebooks including "How to Make Money in Value Stocks"