Interactive Investor

Lloyds Banking makes dividend Top 10

9th November 2016 13:38

Stockopedia from interactive investor

The falling value of the pound this year has had a big impact on the stock market. On one hand, the outlook for some domestic stocks and sectors has turned uncertain. But for others with exposure to foreign markets and currencies, these conditions are ideal.

One of the immediate positive results is that dividends rose strongly in the autumn - but not all sectors did well. So where are the most promising parts of the market for dividend hunters now?

According to new figures from Capita, dividends from UK stocks rose by 1.6% to £24.9 billion between August and October. Strip out the impact of special dividends, and the rise was 2.6% to £23.9 billion.

Crucially, there was a huge £2.5 billion currency gain during the quarter. That was caused by the large dollar- and euro-denominated dividends from the likes of Royal Dutch Shell, HSBC and Unilever being translated at much more favourable rates to sterling.

But under the surface, there were areas of concern. For a start, stocks in the mining sector were responsible for most of the £2.2 billion of payout cuts during the autumn. And, more generally, despite the overall rise in dividends, average payouts fell slightly in third-quarter on the same period last year.

Sectors and indices leading the dividend charge

On a sector basis, the most immediate beneficiaries of a weaker pound have been oil & gas, beverages, pharmaceuticals, banks and mining. The main sources of dividend growth have been telecoms, media, travel and insurance.

Mid-cap profits have outperformed, meaning these companies are growing dividends fasterIn terms of indices, almost all the dividend cuts seen in the third quarter were in the FTSE 100. But the blue-chips also enjoyed most of the foreign currency gains.

By contrast, the FTSE 250 saw the fastest dividend growth. That was up 4.9% on the same period last year, at £2.7 billion. Strip out special dividends, and underlying growth was 11.5%.

According to Capita, FTSE 250 stocks have been well insulated from the trends that have caused so much trouble in the FTSE 100 (such as low commodity and oil prices, and industry pressures in banking and supermarkets). As a result, mid-cap profits have outperformed, meaning that these companies are growing their dividends consistently faster.

Screening the market for dividend payers

With these trends in mind, we created a dividend screen for Interactive Investor looking for high forecast yields in the most promising sectors. Apart from high yield, it looks for dividends that are growing and are well covered by earnings from companies with robust balance sheets.

It also considers the scale of each company's pension deficit as well as the valuation of the shares.

Name

Forecast Yield %

Forecast Dividend Cover

DPS Growth %, Last Year

Pension Dfct / Mkt Cap %

Value Rank

Lloyds Banking

6.4

1.9

200

0.91

63

Aviva

6.0

2.1

14.9

-

93

Stagecoach

5.9

2.0

8.6

10.5

82

ITV

5.6

1.8

27.7

2.62

60

Go-Ahead

4.8

1.9

6.5

0.29

84

Saga

4.7

1.6

75.6

1.41

54

easyJet

4.6

2.0

21.6

-

91

BT

4.5

1.9

12.9

17.7

68

Paragon of Companies

4.3

2.8

22.2

2.33

78

Sky

4.3

1.6

2.1

-

56

In terms of yield, the leading stock on the list is Lloyds Banking Group, which hiked its dividend last year and now has a forecast yield of 6.4%. It is followed by the insurance group Aviva, on 6.0%, which has a more attractive Value Rank of 93/100.

In many cases, the prices of stocks on the list have come under pressure since the summer. Generally speaking, the cheapest stocks are in the transport sector, including Stagecoach, Go-Ahead and easyJet.

But it's worth noting that Stagecoach and BT have considerable pension deficits. That may not be a problem now, but low bond yields are causing concern when it comes to pensions deficits.

Interesting times for dividend hunters

Exchange rates have had a big impact on the landscape for dividends this year. It's early days, but Donald Trump's victory in the US presidential election could impact on the value of the dollar, which means that dividend hunters should take note.

Either way, it's likely that dividend shares will continue to hold the attention of investors. The devaluation of sterling has been a welcome boost in the FTSE 100 and dividend growth among FTSE 250 companies is encouraging.

While the stock market dislikes uncertainty, there are signs that the current conditions still offer interesting options for income investors.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson 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.

●     Interactive Investor readers can enjoy a completely FREE 5-day trial of Stockopedia by clicking here.

It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.

*No fee for publication is involved between Interactive Investor and Stockopedia for this column.

Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"

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.

Related Categories