December is here, Christmas is only weeks away, and as I write, the FTSE 100 index is sitting at 7,300 points.
While that’s a relatively high level for the index, the UK market doesn’t look excessively overvalued, in my view. Many well-known companies are well off their 52-week highs and there’s plenty of stocks to be found that offer low valuations and big dividend yields. While everyone’s talking about Bitcoin and its exponential rise, there’s very little exuberance associated with UK large-cap stocks at present. That’s a good thing, as it means that there’s opportunities for dividend investors.
With that in mind, here are three dividend stock ideas for December.
Aviva (LON: AV) released an excellent announcement last week entitled “AVIVA UPGRADES GROWTH, CASH AND DIVIDEND TARGETS.”
The insurer stated that its financial and strategic position has been transformed, and that it will be returning excess cash to shareholders in the coming years. Chief Executive Mark Wilson commented:
“We have significant surplus capital and cash and this means we will have 3 billion of excess cash to deploy in 2018 and 2019, 2 billion of which we plan to deploy next year. In 2018 we expect to use our excess cash to pay down 900 million of expensive debt, return capital to investors and invest in growing our business, both organically and through acquisitions.
The quality of our earnings has improved by 15 to 20% and with lower debt costs and stronger than expected cash flows, it is appropriate to raise our target dividend payout ratio to 55-60% by 2020.”
That’s fantastic news for shareholders who hold the stock for its dividends. City analysts currently expect dividend payouts of 26.4p and 28.3p per share for FY2017 and FY2018 respectively, yields of 5.2% and 5.6% at the current share price. However, after last week’s announcement, I’d expect those dividend estimates to be upgraded in the near future.
Dividend coverage looks healthy at around two times, and the stock doesn’t look expensive, trading on a forward P/E of just 9.7.
Dividend growth champion Imperial Brands (LON: IMB) continues to trade at an attractive valuation. With many investors chasing growth right now, Imperial has fallen out of favour. However, I believe the recent share price weakness have created a compelling opportunity for dividend investors.
Imperial recently declared a full-year dividend of 170.7p per share for FY2017, a yield of 5.6% at the current share price. The payout ratio was 64%, indicating that the company can afford to pay that level of dividend.
The group has lifted its dividend payout by 10% for nine consecutive years now, an amazing achievement. City analysts forecast another 10% growth for both FY2018 and FY2019.
Neil Woodford recently had this to say about the tobacco giant:
“As a result of the recent share price performance, Imperial Brands has revisited valuation territory that we haven’t seen in many years. The shares currently yield more than 6% which, for such a cash generative business with a long track record of delivering consistent growth, just looks like the wrong price. On a 5-year rolling basis, the shares have never delivered a negative return – clear evidence that, although fundamentals may not always be rewarded over short time periods, over more sensible time frames, they are all that matter. We remain very attracted to the long-term fundamental investment case and added to the position at these very appealing and unjustified share price levels.”
A smart call by Woodford, in my view. I added to my own holding in Imperial recently as well.
Lloyds Banking Group
Lastly, Lloyds Bank (LON: LLOY) is forecast to pay out some big dividends in the coming years, and at the current valuation, I believe the investment case for the bank is attractive.
In the last month, City analysts have upgraded their FY2017 and FY2018 dividend estimates for Lloyds. Analysts now expect a payout of 4.10p per share this year, followed by a payout of 4.59p next year. At the current share price of 65p, those forecasts equate to yields of 6.3% and 7.1%.
The bank currently sports a low forward P/E of just 8.2. This suggests to me that investors are clearly concerned about Lloyds’ exposure to the UK economy. With a great deal of uncertainty as to how Brexit is going to play out, these concerns are no doubt valid.
However, Lloyds appears to have momentum at present. Conduct charges, which have plagued the bank in recent years, are diminishing and as a result, profitability is rising. Given the potential dividends on offer, the risk/reward proposition here looks compelling, in my view. I added Lloyds to my personal portfolio last month.
Disclosure: Edward Sheldon, CFA owns shares in Aviva, Imperial Brands and Lloyds Banking Group.
This article is provided for general information only and is not intended to be investment advice. 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.