The FTSE 100 is known for its vast selection of dividend stocks. Many of these stocks have impressively large yields. Indeed, according to Stockopedia, there’s currently 24 stocks within the index that have dividend yields of 5%* or higher.
However, some dividend stocks are better than others. Many of the stocks that yield 5% or more such as Royal Dutch Shell and GlaxoSmithKline have not increased their dividends in years. Others have very low dividend coverage, suggesting their dividends may not be sustainable.
So what are the best dividend payers in the FTSE 100 right now that yield 5% or higher?
Dividend growth and dividend coverage
When analysing dividend stocks, two things that I always look for are dividend growth and dividend coverage.
If I filter the 5% dividend stocks in the FTSE 100 for the companies that increased their dividends last year, and have dividend coverage of at least 1.5 times*, the list narrows to just seven names.
Lloyds Banking Group
Legal & General Group
From that list, the four 5% dividend stocks that I rate the highest right now are Lloyds, Legal & General, Aviva and ITV. Here’s why:
Lloyds Banking Group
Lloyds has dividend momentum at present.
The bank reintroduced its dividend in FY2014, and since then has increased the payout significantly. It’s also rewarded shareholders with several special dividends.
Analysts currently forecast a dividend payout of 4.02p for 2017, which at the current share price of 66p, is a yield of 6.1%. A further increase is expected for FY2018. There’s cash cow potential here, in my view.
While Lloyds is exposed to the fortunes of the UK economy, I believe the risk/reward proposition here is attractive. The stock is cheap on a forward P/E of 8.5 and the dividend yield is high and growing.
I added Lloyds Bank to my personal dividend portfolio recently.
Legal & General Group
Legal & General is another FTSE 100 company that offers both a high yield and potential for further dividend growth.
The insurer has recorded seven consecutive dividend increases, and analysts forecast growth of 6.4% and 6.2% this year and next. A payout of 15.3p is estimated for FY2017, which equates to a yield of 5.7% at the current share price. Dividend coverage is expected to be around 1.6 times.
Currently trading on a forward P/E of 10.6, Legal & General offers a high yield at a very reasonable valuation.
Sticking with the insurance sector, Aviva also pays a high dividend. The company has recorded three years of consecutive dividend growth and analysts expect further growth this year and next.
Aviva is forecast to pay out 26.4p in dividends this year, an increase of 13% on last year. At the current share price, that’s a yield of 5.3%. Earnings of 54.2p are anticipated, giving a coverage ratio of 2.1.
Ratings agency Moody’s recently upgraded Aviva’s credit rating to Aa3, a positive sign. As a result, Aviva commented:
“Over the past five years, Aviva has significantly improved the strength and resilience of its capital position and has simplified its business structure to focus on those markets where it has the strongest franchises and sustainable earnings and cash-flow.”
A forward looking P/E of just 9.2 suggests that Aviva’s turnaround story has not yet been acknowledged by the market.
Lastly, ITV is another FTSE 100 stock with a high yield, strong recent dividend growth, and healthy coverage.
Sentiment towards advertising-related stocks has been extremely poor in recent months. As a result, ITV’s share price has nosedived. The share price fall has created a dividend opportunity, in my view.
Last year, ITV paid shareholders 7.2p per share in dividends. That’s a trailing yield of 4.8% at the current share price. This year, City analysts expect 9% growth to 7.85p. That equates to a prospective yield of 5.2%.
Dividend growth has been strong in recent years, and coverage looks healthy, at an estimated ratio of 2.0 this year.
Next year brings both the World Cup and the Olympics, which should boost advertising revenues. Trading on a forward P/E of just 9.6, ITV offers long-term value in my opinion. I recently added the stock to my portfolio, as did portfolio manager Neil Woodford.
What about the other three?
Looking at the other three stocks out of the seven, BT has a sizeable pension deficit, which could have significant implications for the dividend in coming years. Taylor Wimpey and Barratt are both housebuilders. That’s a sector I personally tend to avoid when investing for dividends, as dividends can dry up when the sector slows down.
* Using Stockopedia’s ‘rolling’ data which combines past data and estimated forward data to enable a like-for-like comparison of ratios between companies with different reporting dates.
Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell, GlaxoSmithKline, Lloyds Banking Group, ITV, Legal & General Group and Aviva.
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.