Rates of 0.5 per cent at present and the consumer price index closer to 3 per cent represents a significant real loss for cash investors. Many have long looked to equities as a potential source of income, which The Share Centre’s Sheridan Admans (pictured) believes is still a very viable method – particularly given the poor yields across the fixed interest market at the moment. With this in mind, he highlights five dividend-paying stocks that suit an investor who is after a solid source of income.
Lazard’s Alan Clifford recently highlighted the potential risks of relying too heavily on large cap stocks to deliver a healthy level of income, but although Admans believes there are definite opportunities further down the market cap scale, he says the following blue chip companies represent the best bet for income investors considering equities.
Centrica
"With gas consumption rising around 9 per cent in 2012 and predictions expecting an increase of up to 15 per cent in 2013, demand for Centrica is showing no signs of slowing," Admans explained.
"Investors will be happy to hear that Centrica continues to improve its own supply of gas, bracing it against potential gas price movements. The group have an attractive prospective yield of roughly 4.8 per cent for 2014, and intend to buy back £500m of shares over the year."
"What’s more, not only have the group been cutting costs with the aim of delivering £500m in savings, but Centrica aim to double profits in the US business over the next three to five years," he added.
As well as delivering a healthy yield, Centrica has also performed well on a total return point of view, returning 58.63 per cent over a five-year period according to FE data.
Performance of stock and index over 5yrs
Source: FE Analytics
It is a popular stock with UK fund managers and those who focus on equity income in particular. Our data shows that 20 of the 56 IMA funds that hold Centrica in their top-10 sit in the IMA UK Equity Income sector.
National Grid
Admans also rates National Grid as an income play – particularly for investors who are worried about inflation.
"Announcing a new dividend policy in March, wherein dividends will grow in line with inflation from 2014, National Grid’s prospective yield of around 5.4 per cent should appeal to investors," he explained.
"This year’s yield is set to beat inflation by 1 per cent. June’s fall in share price continues to provide investors with a good opportunity to capitalise, with the group showing signs of recovery."
Performance of stock in 2013
Source: FE Analytics
"Additionally, National Grid management are also focusing on improving US operation returns, with regulator issues on both sides of the Atlantic now being resolved," Admans added.
GlaxoSmithKline
GlaxoSmithKline is one of the most popular stocks in the IMA UK Equity Income sector, appearing in the top-10 holdings of more than three-quarters of the 99 constituents. Among its biggest admirers is Neil Woodford, who has an 8.8 per cent weighting in both his Invesco Perpetual Income and High Income portfolios.
The stock has had a strong run of late, retuning in excess of 60 per cent over the past three years. However, Admans thinks there are still plenty of drivers for future returns in spite of its re-rating, which has seen its price-to-earnings [P/E] ratio climb to 20.
Performance of stock over 3yrs
Source: FE Analytics
"The defensive nature of the sector and stock, as well as the competitive yield of roughly 4.5 per cent, makes this a core holding to investors looking for income and portfolio stability," said Admans.
"As a very cash-generative business, GlaxoSmithKline is committed to dividend increases, share buybacks and bolt-on acquisitions; all attractive features to the investor."
"Furthermore, it remains focused on reducing costs, with new manufacturing processes and a major change programme expected to save £1bn a year by 2016. The company’s investments in emerging markets are also paying off, with these regions showing the strongest growth in the first half of 2013," he added.
Vodafone
A high yield and good capital growth potential make Vodafone a good all-round play, according to Admans.
He points to recent M&A activity as likely to benefit the growth of the company rather than an extra kicker to dividends, however.
"Investors may be tempted by Vodafone as a top dividend payer in the FTSE 100 with a prospective yield of 5.2 per cent," said Admans.
"Emerging markets continue to experience steady growth, as do data services, which now represent 15 per cent of revenues and have proven fairly defensive in recent years."
"Vodafone intends to reinvest the dividend received from its US interests into key areas of strategic focus; data, enterprise and emerging markets."
"The group’s US business also continues its strong performance. In the past, Vodafone has passed on the dividend to investors and may do so in the future; however, at present it has no defined agenda to do so."
Overall, 336 funds hold Vodafone in their top-10, including 55 that sit in the UK Equity Income sector.
Unilever
Admans believes consumer goods company Unilever is a good bet for income investors. Many have expressed concern over the stock’s valuation following a stellar run, which has seen its P/E ratio hit 18; however, while Admans believes a short-term correction could occur, he believes it remains a good bet in the longer-term.
"Unilever looks attractive to long-term investors," he explained. "It endeavours to recover costs, expand into emerging markets, focus on profitable volume growth and improve cash-flow; all the while delivering strong returns on capital employed growing its dividend."
"Emerging market operations have delivered 11.4 per cent underlying sales growth, representing 55 per cent of Unilever’s turnover. What’s more, the group should see some improvement in margins as some raw material prices have declined and flattened in this year."
Unilever has delivered 69.75 per cent over a three-year period, making it one of the best-performing FTSE 100 stocks over the period.
Nick Train’s five crown-rated Lindsell Train UK Equity portfolio is one of 121 funds that hold Unilever in their top-10.