3 dividend stock ideas for January

Best dividend stocks January 2018

2018 is here and while the FTSE 100 has recently broken out to new highs, there is plenty of value to be found among UK dividend stocks.

If you haven’t seen it yet, check out my recent article entitled ‘Five of the best UK dividend stocks for 2018.’ I’ve listed five dividend-paying companies that I like the prospects of right now. All five companies have lifted their payouts in recent years and look set for dividend growth in the future.

Today, I’m looking at a further three dividend stocks that I believe have strong prospects at present.

Aviva (LON: AV)

Forecast yield: 5.3%
Dividend cover: 2.0x
Forecast dividend growth FY2018: 9%
Consecutive dividend increases: 3
Forecast P/E: 9.5
Strengths: Returning excess cash to shareholders, attractive valuation
Risks: Financial market volatility

Insurance and investment specialist Aviva only narrowly missed the cut from my five dividend stocks for 2018 list. From the insurance sector I chose Legal & General over Aviva, on the back of its slightly higher yield and better dividend growth history. However, Aviva also has considerable dividend appeal, in my opinion.

The FTSE 100 company has momentum at present, announcing in late November that it was upgrading its growth, cash and dividend targets. It said that it will be deploying £3 billion of excess cash over 2018 and 2019 to repay debt, fund bolt-on acquisitions and provide additional returns to investors.

As a result, City analysts have upgraded their dividend forecasts over the last month. Consensus dividend estimates are now 26.6p for FY2017 and 29.0p for FY2018. Those forecasts equate to yields of 5.3% and 5.8% at the current share price.

The shares look attractively valued, currently trading on an estimated P/E of just 9.5. I like the total return prospects here.

BAE Systems (LON: BA)

Forecast yield: 3.8%
Dividend cover: 2.0x
Forecast dividend growth FY2018: 3%
Consecutive dividend increases: 13
Forecast P/E: 13.3
Strengths: Excellent dividend growth track record, should benefit from US defence spending 
Risks: UK defence budget, pension deficit

BAE Systems is a defence, aerospace and security company. With 36% of its sales coming from the US, the group is well placed to benefit from Donald Trump’s $700bn defence spending boom.

After enjoying a 40% share price rise between June 2016 and June 2017, the stock has pulled back over the last six months. It’s now trading at around 575p, a level at which the yield is beginning to look attractive again.

Analysts currently expect a dividend payment of 21.8p per share for FY2017, equating to a yield of 3.8% at the current share price. Coverage is anticipated to be 2.0 times.

BAE Systems’ dividend growth track record is impressive. It has increased its dividend for 13 consecutive years now. However, growth has generally not been prolific. One reason for this is that the company has a significant pension deficit, and has to direct cash towards plugging the gap. Nevertheless, in the recent past, the dividend has still been increased at roughly the same pace as inflation. Analysts currently forecast dividend growth of 3.1% for FY2018.

An estimated P/E ratio of 13.3 looks to be a reasonable valuation, in my view.

OneSavings Bank (LON: OSB)

Forecast yield: 3.0%
Dividend cover: 3.8x
Forecast dividend growth FY2018: 27%
Consecutive dividend increases: 3
Forecast P/E: 8.6
Strengths: Powerful dividend growth, attractive valuation
Risks: Exposure to UK economy and housing market

Lastly, turning to the mid-cap area of the market, I believe the dividend prospects of OneSavings Bank look compelling at present.

The £996m market cap challenger bank initiated dividend payments in FY2014 with a 3.9p per share payout. Since then, it has increased its payout to 10.5p, growth of an extraordinary 170%.

For FY2017, analysts anticipate dividend growth of 20%, taking the payout to 12.6p per share, a yield of 3% at the current share price. A further 27% growth is expected for FY2018.

That kind of dividend growth warrants attention. It should place upwards pressure on the share price over time, meaning that OneSavings Bank could provide strong total returns over the medium to long term.

The stock is not without risks, however. As a smaller company, its share price is likely to be more volatile than the share prices of the larger UK banks such as Lloyds Banking Group and HSBC Holdings. Furthermore, any economic deterioration in the UK could affect profitability. As a buy-to-let specialist, the bank could also be affected by government intervention in the housing market.

However, on a estimated P/E ratio of just 8.6, the risk/reward profile looks attractive, to my mind.

Disclosure: Edward Sheldon, CFA owns shares Aviva, Legal & General Group, BAE Systems 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.

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