While high dividend payouts are fantastic, when investing for dividends it’s important to remember the old adage “if it looks too good to be true then it probably is.”
There’s currently 37 stocks in the FTSE 350 yielding over 5% at the moment according to Stockopedia, however, many of these companies have low dividend coverage, meaning that their payouts may not be sustainable going forward.
With that in mind, here’s a look at three FTSE 350 dividend stocks that currently yield over 5%, have reasonable dividend coverage and should be able to increase their dividends going forward.
Legal & General Group
Legal & General Group (LON:LGEN) (LGEN.L) is currently one of the better looking 5% dividend stocks in my view.
The insurer paid out 14.4p in dividends for FY2016, meaning that the stock’s trailing yield is a high 5.6% present. This payout was covered 1.55 times by earnings last year.
Unlike many other high yielding companies in the FTSE 100, Legal & General has lifted its dividend considerably over the last five years. The payout has grown from 6.4p in FY2011 to 14.4p last year, a compound annual growth rate (CAGR) of an impressive 18%. City analysts forecast dividend growth of 6.6% and 5.7% this year and next year.
On a forward looking P/E ratio of 11.7, Legal & General looks to offer an attractive yield at a very reasonable valuation. It therefore doesn’t surprise me that the stock is the second largest holding in Neil Woodford’s Income Focus Fund at over 6% of the fund.
Also offering dividend value in my opinion is pub operator Greene King (LON:GNK) (GNK.L).
Sentiment towards the company has been poor over the last 18 months, with the share price drifting down from over 930p to 660p today. The market is concerned that a Brexit-related slowdown and government initiatives such as an increase in the minimum wage will hamper profitability.
Out of favour stocks can present long-term investment opportunities and to me, Greene King’s dividend payout looks rather tempting at present. The pub champion paid out 33.2p per share in dividends for FY2017, which equates to a lofty yield of 5.0% at the current share price. On adjusted earnings per share of 70.8p, dividend coverage was a healthy 2.1 times.
The company has been a dividend growth champion in the past, increasing its dividend by a CAGR of around 10% since 1980. And while I don’t expect that level of growth in the medium term, I believe the company is still capable of small dividend increases in the next few years. City analysts forecast growth of 2.3% and 3.7% for the next two years.
The hospitality environment is no doubt challenging at present, but on a forward looking P/E ratio of just 9.3, I believe Greene King offers value from a dividend investing perspective at the current share price.
Lastly, sub-prime lender Provident Financial (LON:PFG) (PGF.L) also offers a high yield at the moment, after the stock recently plummeted on the back of a profit warning.
The company announced on 20th June that profits in its consumer credit division are likely to fall by £40m this year and the share price has suffered a dramatic fall as a result, now down a huge 30% over the last two months.
Has this fall created a dividend opportunity?
Provident is another favorite of Neil Woodford with the fund manager having significant holdings in both his Equity Income Fund and his Income Focus Fund. In relation to Provident’s recent fall, Woodford stated in his latest monthly update:
“Although this is clearly not helpful, more often than not, the market over-reacts in response to bad news, even if the causes are only transitory. We believe this to be the case here – it doesn’t disrupt the long-term investment case, in our view. Although Provident Financial’s consumer credit division is normally stable and highly cash generative, the real business growth drivers exist elsewhere in the group – Vanquis Bank, Moneybarn and Satsuma all continue to perform very well. Therefore, we believe that Provident’s dividend is unlikely to be affected by this temporary event and the long-term attractions of the group remain very much in place.”
Clearly, Woodford is looking beyond the short-term restructuring issues and focusing on the long-term story.
Provident has been a fantastic dividend growth stock over the last five years, lifting its dividend from 69p in FY2011 to 135p last year. At the current share price, that payout equates to a yield of a high 5.97%. Dividend growth of 2.2% and 8.3% is currently forecast for this year and next year. Dividend coverage is not particularly high at a forecast level of 1.15 for FY2017, but coverage is expected to pick up in FY2018.
This is a stock I’m personally watching with close interest with a view to buying. I agree with Woodford that the significant fall in the share price looks to be an over-reaction to what should be a temporary restructuring issue.
Disclosure: Edward Sheldon, CFA owns shares in Legal & General Group and Greene King.
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.