This list of stocks is for investors who are living off their dividend income or aspire to do so. It follows the tried and tested route of selecting big, reliable dividend payers in defensive industries with market-beating yields.
I could blather on about the merits of this particular investment approach, but I’m sure you’re already aware of them so I’ll just crack on.
1) British American Tobacco PLC (BATS)
Share price 3,600p; dividend yield 4.1%; dividend growth rate 12.9%
I’m not going to win any awards for picking British American Tobacco as it’s such an obvious choice. The preference among many investors to avoid tobacco and the risks from ever-tightening regulations keep the company on low valuations for one with such a successful track record.
If you can stomach the ethical issues and accept the regulatory risks this stock offers a very attractive combination of yield today and growth tomorrow.
2) SSE PLC (SSE)
Share price 1,620p; dividend yield 5.3%; dividend growth rate 7.6%
Again, this isn’t rocket science. As one of the “Big 6” energy companies SSE (formerly Scottish and Southern Energy) supplies the UK with energy and historically that has given the company relatively progressive growth in terms of revenues, earnings and dividends.
SSE is committed to raising its dividend at least in line with RPI inflation, which typically outstrips the official CPI inflation figures. Of course, there are no guarantees that it will be able to do this, but it’s certainly something the company has managed in the past.
Even though the shares are up by almost 5% as I write, as fears of Labour’s “price freeze” dissolve after the Conservative general election victory, its yield is still well above the FTSE 100’s.
3) Vodafone Group PLC (VOD)
Share price 233p; dividend yield 4.7%; dividend growth rate 7.0%
What surprises me about this list is how obvious these selections are as relatively low-risk, progressive dividend choices. But then again I guess the big banks were obvious choices for low-risk, high-yield investors and look how they turned out.
So here we have another household name that has raised its dividend for many years and at a rate that far outstrips inflation. As long as they avoided the dot-com boom and its associated ridiculous prices, most Vodafone investors have done well over the past decade and a half.
Last year Vodafone shareholders had a massive return of cash after the company sold off its share of Verizon, and of course, that won’t be repeated this year. But assuming the company is able to sustain and grow that dividend the current 4.7% yield looks very attractive.
4) GlaxoSmithKline PLC (GSK)
Share price 1,480p; dividend yield 5.4%; dividend growth rate 6.6%
In its most recent quarterly results, Glaxo announced that it would be holding its dividend at 80p for the next three years, so its long record of progressive dividend growth is about to come to an end. To make up for that expected lack of growth, as well as fears from some investors of a dividend cut, Glaxo’s yield today is more than 50% above the FTSE 100’s yield.
This company, along with AstraZeneca, has long been a favourite of a certain Mr. Woodford, although of course that does not guarantee its future success.
5) BAE Systems PLC (BA.)
Share price 510p; dividend yield 4.0%; dividend growth rate 7.7%
BAE Systems, the aerospace and defence company which is also the UK’s largest manufacturer, is another company which many investors prefer to avoid.
Like tobacco, defence companies are off the buy list for a large number of institutional and private investors which is one of the reasons the company trades on relatively low valuations.
For those who are not avoiding defence companies for ethical reasons, BAE at its current price offers a dividend yield that is slightly above the market rate and the potential for long-term, inflation-beating growth (although as ever, no guarantees).
Other factors to consider
Whilst a high dividend yield and a long history of progressive dividend growth are nice, I don’t think either is enough to base an investment decision on. There are a whole bunch of other things that you might want to consider, from a company’s financial strength to its profitability and defensiveness.
You might want to look at these investment questions and maybe even run through them using one of the companies above. Even if they don’t affect your decision to invest or not, you’ll probably end up knowing far more about the company than you did before (which for an active investor is generally a good thing).
Disclosure: I own shares in British American Tobacco, SSE, Vodafone, GlaxoSmithKline and BAE Systems and they are all holdings in the UKVI model portfolio