While the FTSE 100 has performed reasonably well in 2017, in some ways the year has been a little disappointing for dividend investors. The index moved above 7,000 points in mid December last year, and has stayed above the 7,000 mark all year. While there has been a few minor corrections throughout the year, we haven’t really seen any meaningful corrections in which there has been serious panic. As a value/dividend investor, I love those kinds of corrections, as a little panic often throws up excellent buying opportunities.
The lack of volatility in 2017 has meant that many high-quality dividend stocks such as Unilever and Diageo have remained priced at high valuations throughout the year. The dividends yields on offer from such companies have been underwhelming. As a result, there’s been a lack of compelling buying opportunities.
With that in mind, here’s a look at four dividend stocks on my watchlist that I would like to buy in 2018 if the price (and yield) is right.
Unilever (LON: ULVR) is a fantastic company that has significant ‘core holding’ potential in my view. Products such as Dove soap and Persil detergents help Unilever generate relatively stable revenues and profits year after year, irrespective of the state of the global economy. That has resulted in an excellent dividend growth track record over time. Furthermore, strong exposure to the emerging markets also adds a growth angle here.
Unilever is popular among both private investors and institutional investors and for this reason, the stock often trades at a premium valuation. A failed bid from Kraft early in 2017, pushed the stock’s price up further.
While Unilever’s share price has pulled back a little over the last few months, I’m still not seeing much value on offer. With analysts forecasting earnings of €2.22 for FY2017, the stock trades on a forward looking P/E of 21.5. An estimated dividend payout of €1.42 equates to a yield of 3% at the current share price.
While those metrics don’t look outrageous, they don’t stand out as strong value either. Ideally, I’d like to see Unilever shares pull back a little further in 2018. A yield of around 3.5% would get me more interested.
Another company I rate highly and one that I already own is Diageo (LON: DGE). I bought a small position in the alcoholic beverage manufacturer when it was trading under 2,000p late last year. While I shouldn’t complain about a 35% share price gain in the space of 12 months, Diageo’s current share price is a little frustrating because I want to add to my position, yet there’s very little value on offer right now.
Analysts currently expect earnings of 118p for the year ended 30 June 2018, which places the stock on a forward P/E of 22.8 at present. An estimated dividend payout of 67p is a yield of 2.5% right now. That yield is just a little too low for my liking.
However, I’m convinced that with a little patience, there will be opportunities to buy Diageo with a higher dividend yield in the future.
It’s a similar story with Reckitt Benckiser (LON: RB). Great company. Fantastic dividend growth track record. Low current yield.
Neil Woodford sums up the situation with these recent comments:
“In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, like in the early-1970s, become very popular and that popularity has manifested itself in extreme and unsustainable valuations.
I have owned some of the stocks that have benefited from this trend – Reckitt Benckiser, for example, is a very high quality business which I would be delighted to invest in again at the appropriate price. But on the basis of valuation, I have sold it, and others like it, from the portfolios, replacing them with positions which look much more attractively valued.”
Reckitt currently trades on a forward P/E of 20.6 and offers a prospective dividend yield of 2.4%. Those metrics offer minimal value, in my opinion. I’m hoping that with patience, the stock is available to buy with a higher yield at some point in 2018.
Lastly, insurer Prudential (LON: PRU) is a dividend stock I would love to buy in 2018. The company has an excellent dividend growth track record and the group’s exposure to Asia provides a compelling growth story.
While the current forward looking P/E of 13.3 looks like quite a reasonable valuation, the prospective dividend yield of 2.6% just looks a little on the low side.
For this reason, Prudential remains on my watchlist for now. If the share price pulls back in 2018, I will be ready to capitalise.
Disclosure: Edward Sheldon, CFA owns shares in Diageo.
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.