Nine income shares to weather dividend storm
3rd June 2016 11:20
by Kyle Caldwell from interactive investor
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Income investors are having to cope with a more challenging environment, with the number of companies paying attractive, secure dividends in short supply.
At the start of the year analysis by French bank Societe General found the number of shares that yield more than the market had hit its lowest level in 25 years. Around one in four shares in the FTSE 100 currently has a higher yield than the index average, which is around 4%.
This is not the only headwind dividend investors are facing. For some big blue-chip payers, dividends are under pressure. , and have already cut their payments, and other cuts in the mining and oil sectors could be on the way.
But there are plenty of opportunities for stockpickers, according to Mark Slater, who runs , one of our sister magazine Money Observer's Rated Funds.
The fund has returned 92% since it launched in September 2011. In contrast, the average fund in the Investment Association's UK Equity Income sector is up 60% over that timeframe.
The portfolio is divided into three buckets, targeting different types of income shares.
Below, Slater names three shares he is currently backing in each bucket.
Growth stocks with a good yield
Maintel
The MFM Slater Income Fund participated in a recent secondary placing at 700p to help fund the transformational acquisition of communications specialist Azzurri Communications, a B2B technology provider across data, voice and mobile segments.
The deal accelerates a shift for Maintel towards growth areas of the market such as hosted cloud and data. Azzurri has good visibility with recurring revenue, and is cash-generative with an asset-light model.
Maintel is attractively priced and has a decent yield of 3.7%, more than twice covered by earnings, with solid dividend growth prospects.
Wireless Group
Following the completion of the disposal of its TV businesses in Ireland to , business has been significantly simplified and de-risked and debt largely eliminated.
The continuing business has a portfolio of leading radio assets in GB and Ireland, which includes the highly successful talkSPORT station.
The dividend yield is over 4% and in addition, as part of the TV disposal proceeds, a special dividend has been declared.
Greene King
Pub firm offers investors an attractive prospective dividend yield of over 4%, more than two times covered by earnings. Following the acquisition of Spirit, integration is said to be progressing well and ahead of plan, with increased targeted cost synergies of £35 million now identified.
The company has an attractive geographic footprint. It is investing up to £150 million in its branded and managed pubs, whilst disposing of its tenanted and leased estate.
Dividend stalwarts
Imperial Brands
offers investors an attractive prospective dividend yield of 4.4%, covered 1.5 times. The company's first quarter performance - mid-teens growth in net tobacco revenues - was in line with market guidance.
It is on track to deliver full-year dividend growth of at least 10%, which should lend continued support to the share price.
Royal Mail
There are a number of factors supporting share price.
The company's annual price increases for its core letter and parcel business is offsetting the decline in letter volumes, the Christmas trading period was strong, the company's industrial relations is being managed better, the pension situation could well be resolved favourably, and the company has plenty of scope to support margins through self-help measures such as automation.
It has an attractive prospective yield of 4.7%, almost two times covered by earnings.
Redefine Reit
The offers one of the highest dividend yields in its sector, forecast to rise to 7%.
In terms of assets, almost four fifths of the portfolio is in the UK, with the remainder invested primarily in German shopping centres, supermarkets and retail parks.
The trust is targeting a rate of dividend growth above inflation, which should support the share price.
Cyclical high-yielders
Bellway
Housebuilder offers investors an attractive prospective yield of 4.3%, three times covered. As with other builders, the company is experiencing benign market conditions, which includes reasonable land prices, a low interest rate environment, good levels of demand and positive average selling prices.
These factors are offsetting increases in build costs, in particular wage increases. The favourable environment should continue to drive strong revenue growth, higher profit margins and rising return on capital employed.
RPS Group
Support Services specialist is exposed in part to the oil and gas sector, which is currently at the low point of the cycle. However, the company is a strong cash generator and has increased its dividend by 15% a year for 20 years.
Its energy exposure is now far less significant, in part owing to a spate of acquisitions in recent years. The prospective yield currently stands at a punchy 5.75% and the company is modestly rated.
Ocean Wilsons
has an attractive prospective yield of 5.6%, almost two times covered by earnings, and is reasonably priced on a forward multiple of 9.5 times.
Its quoted Brazilian subsidiary Wilson & Sons, the operating company, reported in-line first quarter numbers, notwithstanding extremely challenging trading conditions in Brazil.
Trading at the container terminals business was boosted by rising exports and towage also held up, which offset weakness in its shipyard and offshore energy businesses.
This article was originally published by our sister magazineMoney Observer here.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.