Investors have been in a quandary in terms of where to find decent yields over the last year or so. 
While in the past, many would have turned to fixed income assets for their low risk metrics and steady coupons, unusually loose monetary policy has led to their performance converging with higher risk equities and their yields dropping to historic lows.
When it comes to stocks, many investors have bought into stalwart mega-caps with steady dividend yields, sometimes referred to by sceptics as ‘bond proxies’. While these have come under fire for their high P/E ratios, many other stocks with high yields on cheaper valuations have been criticised for their tenuous balance sheets and their ability to maintain such dividends has been questioned.
In amidst today’s volatile and challenging environment for investors seeking income, Liontrust’s Jamie Clark (pictured), who co-runs the firm’s Macro Equity Income and Macro UK Growth funds, highlights five UK stocks he believes will continue paying steady dividends for a long time to come.
Virgin Money Holdings
While many investors remain nervous of buying into banks following 2008’s financial crisis, their perception as opaque businesses and their vulnerability to hefty fines from the FCA, Clark says that challenger banks remain comparatively unscathed.
“The incumbents are beset by sizeable legacy issues ranging from the regulatory imperative to rebuild capital buffers to the operational difficulties of coping with creaking IT infrastructure and cumbersome and costly branch networks,” he said.
“If we compare Virgin with an incumbent such as Barclays, we see Virgin’s common equity Tier 1 ratio (a measure of its capital buffer as a percentage of risk-weighted assets) of 17.5 per cent is well ahead of Barclays’ 11.4 per cent (both December 2015), a level so low it has announced the sale of its African unit with a view to boosting capital.”
The manager says that this contrast in capital spills over in to both firms’ abilities to pay dividends. While Barclays announced a dividend cut last month, Clark says that Virgin is expected to grow its yield exponentially over the next three years.
“When investing with a long term time horizon, it is important to look at dividend growth potential rather than the current yield level alone,” he added.
Over the last year, Virgin Money Holdings has underperformed its FTSE 250 index by 8.71 percentage points with a loss of 7.01 per cent. However, since the stock floated at the end of 2014, it has provided a total return of 26.23 per cent compared to its index’s return of 12.61 per cent.
Performance of stock vs index since IPO
Source: FE Analytics
Aviva
As life expectancy in the developed world continues to increase and contraception improvements are reducing birth rates, Clark says that life insurers and pensions providers such as Aviva are likely to experience strong growth and an increase in free cash flow.
“In recognition of this trend and the associated cost of providing for an expanding elderly cohort, both business and government have sought to mitigate their obligation by shifting responsibility to the individual,” he explained.
“The recent Budget announcement of an increased ISA allowance and the new Lifetime ISA are consistent with this endeavour to encourage savings. Savings and pensions providers are clear winners from these trends, and have a fantastic opportunity to gather sticky, remunerative, long-term assets through product innovation and partnerships.”
The manager believes that Aviva is a particularly good stock to play this theme, given that it acquired rival provider Friends Life last year. As such, he expects the company’s cash flow to support a dividend yield of approximately 5 per cent in 2016.
Since Friends Life was bought by the firm, it has provided a loss of 17.62 per cent compared to its FTSE 100 Index’s loss of 9.27 per cent.
Since CEO Mark Wilson has been at the helm though, it has outperformed the blue-chip index by 18.18 percentage points with a return of 36.22 per cent.
BT
Telecoms giant BT has attracted the attention of many investors recently, given that it acquired mobile operator EE in February this year.
While the move raised eyebrows in the industry, with many smaller firms arguing that it could harm the revenue of rivals in the sector, The CMA [Competition and Markets Authority] ruled that this would not be the case given that EE is smaller in broadband and BT was less prevalent in the mobile space.
From a broader perspective, Clark believes that the global telecoms sector will undergo a material re-rating as it transitions from value to growth.
“It is clear that a multi-play offering is key to enhancing customer loyalty and reducing churn rates,” Clark continued.
“The growing importance of TV content has shifted the telecoms and media landscape from one of ‘triple-play’ in the noughties to ‘quad-play’ now. We take the view that this content push will be key in enabling operators to leverage unprecedented rates of data consumption and convert it to top line growth, which, we infer, will translate into increased operating cash-flow and dividends.”
The manager says that BT in particular has transformed its growth outlook through BT Vision and improved content on BT Sport, which has boosted its popularity in the consumer space as opposed to traditional wholesale markets.
“Its acquisition of a mobile network through EE was also a very shrewd move, immediately transforming the business to a genuine quad-play offering consisting of TV, broadband, landline and mobile,” Clark said.
In addition to its dividend growth, BT has provided a total return of 180.67 per cent over five years, outperforming its FTSE 100 index by more than six times.
Performance of stock vs index over 5yrs
Source: FE Analytics
AT&T
Clark is using US telecoms corporation AT&T as a play on the growth in data consumption, which he says is a global phenomenon, pointing out that Cisco recently reported a growth of 74 per cent in data traffic for last year alone.
“In fact, with British American Tobacco estimating an industry cigarette volume decline of 2.3 per cent in 2015, there are reasons to believe that telecoms is the heir to tobacco’s title of equity income addiction sector,” he said.
“This data consumption ‘addiction’ is no weaker on the other side of the Atlantic; a survey by The Boston Consulting Group found that almost a third of adult respondents would rather give up sex than their mobile phones.”
In a similar vein to BT, AT&T is the largest TV provider in the US, having bought satellite provider DirecTV.
Not only will the fund benefit from an increased demand for data consumption, according to Clark, it will also provide a short term benefit in being exposed to the dollar at a time when Brexit concerns are taking their toll on the strength of sterling.
Galliford Try
Housebuilders have divided opinion among investors – while some are deterred by their high P/E ratios and their long period of outperformance, others believe the sector still has further to run.
In an article published last month, FE Alpha Manager Mark Martin warned that the housing market could be at risk of a correction soon.
“There are some reasons in my view to be a little bit cautious about the outlook for retail sales and potentially the housing market. I’m obviously aware that many people have tried to call the top of the housing market in the UK for many years and it’s a dangerous thing to do, but equally it’s very dangerous to assume that house prices are going to continue to rise as quickly as they have done in the indefinite future,” he said.
While Clark admits that Galliford Try is not immune to the volatility that characterises the housebuilding sector, he says it is likely to generate secular growth because of its exposure to areas such as low cost housing, regeneration projects and the retail housing market.
“UK housebuilders are beneficiaries of the large shortfall between the number of annual house completions and the volume of UK housing stock growth necessary to accommodate longer life expectancy and immigration (as well as replacement of existing stock),” the manager explained.
“Another driver for Galliford Try’s business is the growth in contract work and self-employment. This, coupled with house price rises, slowing wage growth and lender caution, is placing home ownership beyond the reach of growing numbers of people, opening up significant growth opportunities in social/low-cost housing and regeneration.”
Since the stock’s share consolidation in 2009, it has provided a total return of 269.28 per cent compared to its FTSE 250 index’s total return of 121.77 per cent.
Performance of stock vs index since consolidation
Source: FE Analytics
