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The top-10 highest yielders in the FTSE

Two equity experts review the stocks paying out the highest amount to their shareholders and explain whether they think these dividends are sustainable or not.

By Alex Paget, Reporter, FE Trustnet
Wednesday February 27, 2013


Finding high-yielding – and even more importantly, sustainable – assets has become more important in the current economic climate.

Even today, the Bank of England discussed the possibility of negative interest rates which would deal an even bigger blow to savers.

With investment grade bonds yielding next to nothing, more and more investors are turning to dividend-paying equities in the search for income.

However, it is not just about locating high-yielding companies; investors need to be confident that these stocks are able to maintain their dividend, or better still increase it.

Richard Hunter, head of equities at Hargreaves Lansdown, says that a company’s dividend cover is the most vital component to the sustainability of its yield.

Highest-yielding stocks in the FTSE: 1 to 5

Stock Yield Sustainable?
Resolution 7.83% Maybe
Aviva 7.27% No
ICAP 6.53% Maybe
RSA Insurance Group 6.06% No
Vodafone 5.94% Yes

Source: FE Analytics

"In theory, if a company’s dividend cover is under 1-times earnings, then they are effectively paying out their dividend from last year’s earnings – which obviously means their yields could prove difficult to maintain," he explained.


Resolution – 7.83% yield

UK insurer Resolution is the highest-yielding company in the FTSE, but Hunter is not convinced this will be the case for much longer.

"Resolution is an awkward one; there has been a lot of talk about them having to cut their dividend – especially as they have a dividend cover of 0.8 times," he said.

"However, the current yield is around 7.5 per cent and they have a projected yield of 8.2 per cent – this suggests they are looking to increase the dividend, more than anything."

According to FE Analytics, despite the fact Resolution is currently the highest-yielding company in the FTSE, only 23 funds in the IMA universe count it as a top-10 holding. This  includes Schroder Income Maximiser.

The majority of funds that hold it are growth orientated – for example, FE Alpha Manager Martin Walker’s Invesco Perpetual UK Growth fund has a 4.21 per cent weighting to Resolution.


Aviva – 7.27% yield

Hunter is even less optimistic about Aviva’s 7.27 per cent yield.

"I think it is unlikely Aviva will be able to maintain their dividend, but we will know soon enough as their annual earnings report is due a week tomorrow," he said.

Twenty-four funds count the insurer as a top-10 holding. FE Alpha Managers Andrew C Green and Julie Dean both have large weightings in their GAM UK Diversified and Cazenove UK Opportunities funds, respectively.



ICAP – 6.53% yield

"ICAP’s projected dividend is flat to what it currently is, so that certainly asks the question whether or not it is sustainable," Hunter continued.

"However, it does have a 1.6-times dividend cover, which suggests it could be sustainable."

Guinness Global Equity Income is the only fund in the IMA universe to hold the fund in its top-10.


RSA – 6.06% yield

Hunter says RSA’s chance of maintaining its 6.06 per cent yield is zero, as the company has already cut its forecast.

"The yield has already been cut due to a drop in performance last year – and the share price took a hammering because of it. It has cut its yield to 5.5 per cent, which is still quite punchy in a world of very low interest rates," he said.

All in all, 21 funds hold RSA in their top-10. These include FE Alpha Manager Leigh Harrison’s Threadneedle UK Equity Income, FE Alpha Manager Crispin Odey’s CF Odey Opus, and Artemis High Income – which is run by FE Alpha Managers Adrian Frost and Adrian Gosden.


Vodafone – 5.94% yield

"Vodafone has a good dividend cover and is projecting a yield increase from 5.9 per cent to 6.1 per cent, so there is no reason to suggest that they would walk away from their dividends," said Hunter.

"However, the question is whether they can repeat their special one-off dividend – which came from their 45 per cent holding in Verizon."

More than 10 per cent of funds in the IMA universe hold Vodafone in their top-10, making it one of the most popular stocks overall.

FE Alpha Manager Robin Hepworth’s Ecclesiastical Higher Income and Francis Brooke’s Trojan Income are two of 338 funds that have a high weighting to the telecoms company.

Highest-yielding stocks in the FTSE: 5 to 10

Stock Yield Sustainable?
Scottish & Southern Energy 5.67% Yes
BAE Systems 5.61% Yes
National Grid 5.55% Maybe
GlaxoSmithKline 5.02% Yes
Royal Dutch Shell 4.96% Yes

Source: FE Analytics

Graham Toone (pictured), head of research at AFH Wealth Management, is less strict than Hunter when it comes to determining how sustainable a yield is.

ALT_TAG "We like companies that have at least 1.5-times dividend cover, but prefer to have that closer to 2-times," he said.

"Anything lower than that means the company has to dip into its savings in order to pay their shareholders – which is not ideal."


Scottish & Southern Energy – 6.67% yield

"We are comfortable with Scottish Southern Energy and it is one we buy," said Toone.

"Although the dividend isn’t covered as well as we would like – just 1.2-times – we feel the business will be able to deal with this level."

FE data shows that no open-ended funds count Scottish & Southern Energy as a top-10 holding.



BAE Systems – 5.61% yield

"BAE Systems is 2-times covered so I think that is certainly a level of dividend yield they can keep," said Toone.

FE Alpha Manager Neil Woodford holds BAE Systems in the top-10 holdings of his Invesco Perpetual High Income, Invesco Perpetual Income and SJP High Income funds.

The other 28 funds that count the defence and aerospace company as a top-10 holding include the five crown-rated Rathbone Blue Chip Income & Growth and Majedie UK Equity portfolios.


National Grid – 5.55% yield

"National Grid – like Scottish Southern Energy – is borderline," said Toone. "It is yielding 5.5 per cent but its dividend cover is 1.2 times, which is a bit more concerning.

"However this one isn’t a stock we are buying at the moment."

Trojan Income is one of 21 funds that count National Grid as a top-10 holding.


GlaxoSmithKline – 5.02% yield

Toone is confident about Glaxo’s ability to sustain its yield.

"GlaxoSmithKline is a popular income-generative holding and it is one we use," he said.

"Although it isn’t as well covered as people think – at 1.5-times earnings – I think that dividend is sustainable as it is a well-run company."

Seventy-two per cent of funds in the IMA UK Equity Income sector count Glaxo as a top-10 holding. Around 360 funds in the entire IMA universe have a high weighting to the pharmaceutical company.


Royal Dutch Shell – 4.96% yield

"Royal Dutch Shell’s dividend yield is well guarded – its dividend cover is at least 2-times earnings and it is a stock we like and use for our clients," Toone finished.

Royal Dutch Shell is another universally popular stock with fund managers.

All in all, 362 funds hold the energy company as a top-10 holding, including the likes of Liontrust Special Sits, which is run by FE Alpha Managers Anthony Cross and Julian Fosh.



 
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Rudy Feb 28th, 2013 at 08:50 AM

A very shallow article, for example what does he base his opinion of Aviva on

Reply
Theo Feb 27th, 2013 at 06:08 PM

In my humble opinion a very unsatisfactory way of writing.

It does not start by saying in each case what the company's business is, eg what is Resolution doing? And Aviva, the biggest insurance Co. in the country, is just an insurer in the last paragraph.

Newspapers which only have one line per company include P/E ratios but here we have to be told by HL what the dividend cover is.

Just an excuse to plug the same, regular, IFA names.

Reply
Halo Feb 27th, 2013 at 11:12 PM

I think the key phrase there Theo was "UK insurer Resolution..."

I'm sure these journalists are far more thick skinned than I am, but I have to take exception with this comment. I've been reading trustnet for about a year now and it's one of the first times i've heard from either of these two analysts.

It's a useful study, and in no way self indulgent.

A real shame all people seem to want to do on here is criticise. Especially annoying when they clearly don't read the article properly.

Reply
Theo Feb 28th, 2013 at 12:04 AM

Halo, You have answered one of the 4 points of of criticism I made and I omitted many others. Writers in journals and book authors expect reader's criticism and learn from it.

The most annoying people (and the most boring) are the perpetual flatterers, not the critics.

Reply
 

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