Five of the best UK dividend stocks for 2018

best dividend stocks UK 2018

2018 is only days away now and at this stage, the FTSE 100 looks as if it will finish the year strongly. As I write, the index is above 7,600 points and has just hit a new high.

However, despite the index’s strength, there is still plenty of value to be found within the UK stock market right now. This is especially true in relation to dividend stocks, as many investors have focused on growth stocks in 2017.

With that in mind, today I’m looking at the best UK dividend stock opportunities for 2018.

As always, in putting together this list of the best dividend stocks for UK investors, I’ve looked beyond headline yield, and considered factors such as dividend growth, dividend cover and valuation. I have picked out stocks that I believe can grow their dividend payouts in the future and provide investors with attractive total returns.

Here are five dividend stocks that I believe offer potential right now.

Legal & General Group (LON: LGEN)

Forecast yield: 5.7%
Dividend cover: 1.7x
Forecast dividend growth FY2018: 6%
Consecutive dividend increases: 7
Forecast P/E: 10.6
Strengths: Business has momentum, attractive valuation 
Risks: Considerable UK focus, financial market volatility

In my opinion, Legal & General Group is one of the best FTSE 100 dividend stocks at present. The stock ticks many boxes from a dividend investing perspective.

For a start, the yield is excellent at 5.7%. Coverage is solid at 1.7 times. Dividend growth momentum is strong, with the insurer having recorded seven consecutive dividend increases. Furthermore, City analysts expect the dividend growth to continue going forward. A forward looking P/E ratio of 10.6 looks good value, to my mind.

The company noted in December that it is on track for a record year for earnings and profits, stating that it “continues to see great momentum in all its business in the year to date.” Looking ahead, management said that Legal & General remains “strategically well placed to deliver strong, attractive growth and returns in our core markets.”

The stock has spent much of the last three years trading between 225p and 275p, yet in this time, the dividend has been hiked over 25%. This leads me to believe that, barring a collapse in financial markets, the share price could rise higher in 2018.

Lloyds Banking Group (LON: LLOY)

Forecast yield: 6.1%
Dividend cover: 1.9x
Forecast dividend growth FY2018: 12%
Consecutive dividend increases: 3
Forecast P/E: 8.5
Strengths: Simple banking model, low valuation
Risks: Exposed to UK economy, Brexit uncertainty

Sticking with the financial sector, I also rate Lloyds Bank as one of my best dividend stocks for 2018.

Lloyds doesn’t have the dividend track record that many other UK dividend stocks have, as it cut its dividend during the Global Financial Crisis.

However, profitability has improved in recent years, and with conduct charges diminishing, Lloyds’ dividend prospects now look compelling.

The bank reinstated its dividend in FY2014 and since then, has increased its dividend twice. It has also paid two special dividends as well.

An expected payout of 4.14p per share for FY2017 equates to a huge yield of 6.1% at the current share price. That payout is expected to be covered 1.9 times. What’s more, analysts expect the dividend to be increased significantly in FY2018.

Shares in Lloyds aren’t without their risks. The bank is essentially a proxy for the UK economy. This means that if Brexit results in a recession, profitability at Lloyds will most likely deteriorate. That could impact dividends. However, on a forward looking P/E ratio of just 8.5, I believe the risk/reward profile here is attractive.

Imperial Brands (LON: IMB)

Forecast yield: 6.1%
Dividend cover: 1.4x
Forecast dividend growth FY2019: 9%
Consecutive dividend increases: 17
Forecast P/E: 11.8
Strengths: Excellent dividend growth history, low valuation compared to peers
Risks: Tobacco regulation 

Shares in tobacco manufacturer Imperial Brands have been neglected by investors in the latter half of 2017. After trading above 3,900p in April, the stock has fallen to 3,100p.

That share price fall has created an opportunity for dividend investors, in my view.

For FY2018, analysts expect a payout of 188p, a yield of 6.1% at the current share price. Dividend coverage is anticipated to be 1.4 times – a level that is not particularly high, but not a cause for concern either.

Imperial has an outstanding dividend growth history, having now recorded nine consecutive dividend increases of 10%. It has promised to keep increasing its payout at that level in the medium term.

While political intervention poses a risk to the sector, I believe these risks are priced in.

Portfolio manager Neil Woodford recently stated that the current valuation looks unjustified and that Imperial is “a business which should deliver attractive and sustainable long-term growth.” 

WPP (LON: WPP)

Forecast yield: 4.5%
Dividend cover: 2.0x
Forecast dividend growth FY2018: 5%
Consecutive dividend increases: 7
Forecast P/E: 11.1
Strengths: Excellent dividend growth history, low valuation
Risks: Structural changes to the advertising industry

WPP is another FTSE 100 stock that has an excellent dividend growth history. The world’s largest advertising company has never cut its dividend and has only ever once not increased its payout, in 2010. In its August half-year results, the dividend was hiked by 16%. Despite this impressive track record, WPP is often overlooked by dividend investors. This is probably due to the fact that advertising is a cyclical industry.

The cyclical nature of the industry has taken its toll on WPP’s share price this year. As companies such as Unilever have cut their advertising budgets, sentiment towards WPP has deteriorated. The stock has fallen from above 1,900p in March to around 1,350p today.

At that price, the stock has dividend appeal, in my opinion. With analysts forecasting a payout of 60.4p per share for FY2017, the prospective yield has been elevated to 4.5%. Coverage is healthy at 2.0 times and analysts expect dividend growth of 5% next year.

Of course, the investment case here is not without risks. One such risk is the threat that digital advertising poses to the industry. This should not be ignored.

However, given that WPP has significant exposure to digital advertising, as well as exposure to growth markets China and India, I believe the recent share price fall is overdone. UBS recently named the stock as one of its top stocks for 2018.

DS Smith (LON: SMDS)

Forecast yield: 3.2%
Dividend cover: 2.1x
Forecast dividend growth FY2019: 8%
Consecutive dividend increases: 5
Forecast P/E: 15.1
Strengths: Well placed for e-commerce boom, strong dividend growth 
Risks: Rising paper costs, integration risk 

Lastly, despite not having a super high yield, I rate FTSE 100 newcomer DS Smith as a top dividend stock for 2018.

The packaging specialist, which is Amazon’s sole provider of cardboard boxes in England, looks well placed to capitalise from the rise in e-commerce and changing consumer preferences. A recent expansion into the US adds geographic diversification.

DS Smith’s recent dividend growth has been prolific, with the payout hiked by around 50% over the last three years. A forecast increase of 7% this year takes the prospective yield to 3.2%. Coverage is expected to be strong at around 2.1 times.

The stock performed well in 2017, rising around 25%. However, the current forward looking P/E ratio of 15.2 still looks reasonable, as revenue and profits are expected to rise substantially in coming years.

Overall, I believe DS Smith has the potential to deliver strong total returns over the medium to long term.

 

Disclosure: Edward Sheldon, CFA owns shares in Legal & General Group, Lloyds Banking Group, Imperial Brands, WPP and DS Smith.  

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.

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