LONDON -- The FTSE 100 has fallen recently, yet many blue-chip shares are increasing shareholder dividends. The result is that it is now incredibly easy to construct a diverse, high-yield, large-cap portfolio.
Remember that dividends can be held, increased, decreased, or even dropped entirely.
I have tried to build a diverse portfolio with shares coming from a range of sectors:
|
Company |
Price (pence) |
Yield (forecast) |
P/E (forecast) |
Market Cap (millions of pounds) |
|---|---|---|---|---|
| RSA Insurance | 115 | 8.37% | 11.6 | 3,960 |
| Vodafone | 159 | 7.43% | 10.2 | 78,180 |
| AstraZeneca | 2,891 | 6.26% | 7.5 | 35,560 |
| BAE Systems | 310 | 6.25% | 7.7 | 10,090 |
| SSE | 1,406 | 5.97% | 12.3 | 13,420 |
| BP | 436 | 5.47% | 7.3 | 82,890 |
| British Land | 535 | 5.02% | 17.8 | 4,710 |
| HSBC | 626 | 4.38% | 10.9 | 114,010 |
| J Sainsbury | 334 | 4.95% | 11.3 | 6,240 |
| National Grid | 711 | 5.79% | 12.9 | 25,740 |
Source: Stockopedia.
Four shares stood out in particular.
1. RSA
RSA is the company behind the MORE TH>N insurance brand.
Often when a company has been paying a high dividend, that payout has not been rising or has little prospect of increasing in the future. At RSA, however, the dividend has been increased every year since 2006. This is thanks to the level of profitability the company was able to maintain throughout the financial crisis.
For 2012, brokers are expecting 11.8 pence in earnings per share and a dividend of 9.4 pence. Currently, a 20% decline in profit would mean the RSA dividend would have to be paid in part from borrowings or reserves. Normally, investors want to see dividends better covered by profits.
Two things mean I'm not especially worried about the RSA payout. First, the company has managed to continue increasing its dividend through what must have been some very tough years. Second, RSA is forecast to deliver substantial profit growth in 2013. This would lead to a far higher level of dividend cover. For 2013, analysts estimate that RSA will earn 13.4 pence per share and pay a 9.5 pence dividend.
2. British Land
British Land is the property company behind some of the best-known commercial properties in the U.K.
British Land is owner of Sheffield's Meadowhall Shopping Centre and the site of Debenhams on Oxford Street. Income from British Land's asset portfolio underpins cash flows to investors.
British Land is not a normal trading company. It is incorporated as a real-estate investment trust. This is the normal status of U.K.-listed property companies. This means a different set of accounting rules and dividend policy applies. The gist of this is that a large proportion of profit from property rental must be paid out. The result is that dividends that are almost as large as reported earnings.
For the year ending March 2012, the British Land dividend rose to 26.1 pence. This was the first increase from the company since 2009.
British Land pays shareholders four dividends a year. The first two dividends of the new year were 6.6 pence per share each, up from 6.5 pence the previous year. Analysts expect the company will pay 26.5 pence of dividends over the course of the full year.
3. BP
Since the disaster in the Gulf of Mexico, BP has been raising its dividend fast.
From $0.15 (BP reports in U.S. dollars) in 2010, BP paid $0.29 in 2011. Analysts expect a $0.38 dividend for 2012, rising to $0.43 in 2013.
This would still leave BP paying less than it did before the Macondo spill. In 2009, BP paid its shareholders a massive $0.59 for the year 2009. This would equate to a huge 8.4% yield at today's share price.
The last few months have been eventful for BP. The company has announced three key agreements. First, BP has agreed to a $4.5 billion fine with the U.S. authorities over the sequence of events that led to 11 deaths in the Macondo incident. BP also announced a clean divorce from former partners in its Russian TNK-BP joint venture. Thirdly, BP finalized terms for a new collaboration with Russian national oil company Rosneft.
This all means that the investment case now contains materially less risk. If the Rosneft deal proves to be as beneficial as the TNK-BP venture was, earnings could recover to pre-Macondo levels. That would only be good for the dividend.
4. National Grid
National Grid runs electricity and gas distribution throughout the U.K. The company also owns 50% of BritNed, a joint venture with Dutch firm TenneT. BritNed is a 1,000 MW capacity power link between Britain and the Netherlands.
Running power infrastructure gives National Grid access to secure and predictable cash flows. This means that the company can sustain large debts and pay a big dividend.
That dividend was increased every year from 1997 to 2010. Although the payout was cut 5% in 2011, it has since increased again. Analysts expect the dividend to rise for the next two years, taking the 2013 full payout to 41.6 pence. Earnings growth is expected to outstrip this, meaning dividend cover will increase.
National Grid trades on 14.4 times its most recent annual profit. With the forecast growth, this falls to 12.9 times earnings in 2013 and 12.8 times expectations for 2014.
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