UK stocks had a good month in May, with the FTSE 100 breaking out to a new all-time high.
As a result, there’s definitely less value on offer at present than there was a few months ago, when the FTSE 100 was below 7,000 points.
Given the high level of the stock market at the moment, I think it’s worth being a little cautious towards stocks right now and stockpiling capital in preparation for another market pullback. It’s most likely only a matter of time until market volatility returns and stock prices fall, pushing up yields.
Having said that, here are three dividend stocks that do look attractive at present, in my opinion.
Forecast dividend FY2018: 8.1p
Forecast yield FY2018: 4.7%
Forecast dividend cover: 1.9x
Forecast dividend growth FY2018: 4%
Consecutive dividend increases: 6
Forward P/E: 11.2
Strengths: Strong performance from the content division
Risks: Weak advertising market
I highlighted ITV (LON: ITV) as a key dividend stock idea back in April when the shares were under 150p. Since then, the shares have climbed above 170p, yet, I still think the stock offers considerable appeal from a dividend investing perspective, as the prospective yield remains healthy at 4.7%.
A Q1 trading statement released in May showed that the company has solid momentum at present. Total external revenue increased 5%, while revenue from ITV Studios, the content division, climbed 11%. The group advised that total advertising revenue is expected to rise 2% for the first half of the year.
While the advertising market remains weak, it’s worth remembering that ITV is a significantly more diversified business than it used to be and now generates around 56% of revenues from sources other than spot advertising. So, this removes a little risk from the investment case.
City analysts forecast a dividend payout of 8.1p per share this year, with earnings expected to cover the dividend approximately 1.9 times. Trading on a forward P/E of just 11.2, I think ITV shares still offer plenty of value.
Forecast dividend FY2018: 188p
Forecast yield FY2018: 7.1%
Forecast dividend cover: 1.4x
Forecast dividend growth FY2018: 10%
Consecutive dividend increases: 10+
Forward P/E: 10.0
Strengths: Excellent dividend growth track record
Risks: Declining smoking rates, high debt
Another dividend stock offering strong value right now is tobacco manufacturer Imperial Brands (LON: IMB). The stock currently trades on a forward P/E of just 10.0 and offers a big yield of 7.1%.
Half-year results released in May showed that Imperial is making good progress on its strategy of focusing on growth brands and Next Generation Products (NGP). While total tobacco volume did fall 2.1% for the half year, the group advised that it is on track to deliver on its full-year expectations. The company also stated that it is planning to raise £2 billion by selling off non-core assets, in order to reduce debt, simplify the business and enhance performance.
Often, when a stock has a yield above 7% it pays to be cautious. A high yield can signal that a dividend cut is on the cards. Yet, a dividend cut doesn’t look likely for Imperial, in my view, as the company recently increased its interim dividend by 10%. Furthermore, on a 12-month basis, the dividend payout ratio was 68%, so there’s a margin of safety there. It’s worth noting that Imperial has now recorded nine 10% dividend increases in a row.
There are plenty of risks to the investment case here, of course. For example, smoking rates are declining in the Western world. The group also has a fair chunk of debt on its balance sheet. Yet, at the current valuation, the risk/reward profile looks attractive, in my opinion.
Tritax Big Box REIT
Forecast dividend FY2018: 6.7p
Forecast yield FY2018: 4.4%
Forecast dividend cover: 1.1x
Forecast dividend growth FY2018: 5%
Consecutive dividend increases: 4
Forward P/E: 21.2
Strengths: Benefitting from growth in online shopping
Risks: Low dividend coverage
Lastly, for a more obscure dividend pick, check out FTSE 250-listed Tritax Big Box REIT (LON: BBOX).
BBOX is a real estate investment trust dedicated to investing in very large logistics facilities, known as big boxes.
Big boxes are storage facilities that hold finished goods for distribution to consumers. Companies such as Amazon, Argos and B&Q use them to store their goods.
Tritax Big Box REIT owns a portfolio of big boxes that is well diversified by size, geography and tenant. The big boxes typically occupy prime locations and are fully let on long leases to blue-chip tenants. As such, the REIT looks to be a good way to play the boom in online shopping, in my view.
The dividend prospects here look attractive.
BBOX states that its aim is to provide an “attractive, secure and growing income for our shareholders, together with capital appreciation.”
Since listing in December 2013, it has paid out dividends of:
FY2014: 4.2p per share
FY2015: 6.0p per share
FY2016: 6.2p per share
FY2017: 6.4p per share
This year, it expects to pay out 6.7p per share, growth of 4.7% on last year.
At the current share price, that equates to a prospective yield of 4.4%.
Investors might be concerned about dividend coverage, as it looks low at a ratio of 1.1x. However, there are two points to note here.
First, REITs are able to avoid being taxed at corporate level if they pay out 90% of their taxable income. So, a low dividend coverage ratio is to be expected.
Second, at the end of 2017, the group had distributable reserves of £626m, which it could dip into to boost the dividend payout if profits deteriorated.
The valuation of the REIT isn’t particularly cheap, as with analysts forecasting earnings of 7.2p per share for FY2018, the forward-looking P/E ratio is 21.1. Yet, given the long-term growth story associated with the rise of online shopping, I think that’s a fair price to pay.
Investors should note that REIT distributions are tax-free within an ISA or SIPP, but taxed at 20% at source outside these wrappers.
Disclosure: Edward Sheldon, CFA owns shares in ITV, Imperial Brands and Tritax Big Box REIT.
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.