It’s not a hard and fast rule, but companies that tend to pay dividends can come from sectors where demand for their products is more reliable. That can take a number of forms.
A track record of holding or growing the dividend steadily over time is what we prefer. When a company has paid dividends for years, management tend to be more focused on maintaining them.
Here are three share ideas to help give your investment portfolio more income. All information unless otherwise stated is correct as at 31 October 2023.
As always though, keep in mind that yields are variable, and no dividend is ever guaranteed.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Ratios shouldn’t be looked at on their own.
Investing in an individual company is higher risk. If that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are held as part of a diversified portfolio.
American Electric Power
No matter what happens, people still need power.
American Electric Power (AEP) is an enormous utility, providing power to over five million Americans across the US. It owns and runs the biggest electricity transmission systems in the country – think physical pylons and cables.
It also generates power that flows through those systems. This huge scale and integrated operating model helps boost efficiency, which keeps customer prices down – adding to its reliable revenue stream.
AEP second quarter earnings by segment ($mn)
Source: American Electric Power second quarter results, 2023.
Offering an essential service underpins consistent earnings growth. Annual operating earnings are expected to grow 6-7%.
This underpins the dividend, which is currently growing in-line with earnings growth – there’s a prospective yield of 4.7% on offer.
AEP’s also making tracks to simplify its business and slim the portfolio. We support this move – more focused businesses are nimbler. There’s also a lot of effort and money going into clean energy which is a strong growth area in our opinion.
Debt levels are a bit higher than we’d like. This isn’t overly unusual for capital-intensive utilities, but it’s something to keep an eye on.
Utility stocks by their nature and regulatory oversight mean growth is unlikely to shoot the lights out. But being in the business of keeping the lights on is about as resilient as it gets – a strength we don’t think is fully reflected in the current valuation.
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British American Tobacco
British American Tobacco (BATS) offers a prospective yield of 10.1%.
Selling an addictive product means revenue streams are pretty reliable. Expectations are that BATS’ revenue will inch towards £30bn in the next couple of years.
BATS is dealing with the fact fewer people smoke these days. But it’s been able to ramp up its prices because tobacco users are some of the least price sensitive consumers going. This feeds into BATS’ ability to spend nearly £5bn last year on dividends.
At six times expected earnings, the market isn’t overly excited by the group’s growth prospects. This is partly centred around the unclear route for long-term success of vapes and e-cigarettes.
It’s also related to the fact lots of institutional investors can't, or won't, invest in the tobacco sector. That can keep a lid on demand, and therefore valuation.
BATS full year revenue 2022
Source: British American Tobacco full-year results, 9/02/2023.
This doesn’t concern the group’s ability to pay dividends well into the future – which we believe they can. However, it’s something investors will need to consider.
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Kimberly-Clark
Kimberly-Clark is another dividend aristocrat.
It’s paid a dividend for 89 consecutive years and increased dividends for the last 51 of them. The prospective yield is 4.1% and the dividend looks reasonably covered by earnings.
Its reliable cash flows are due to its position in the ‘consumer defensive’ category. It sells the products people buy no matter what’s going on in the economy.
This consumer giant is responsible for disposable nappies, training pants, incontinence products, baby wipes as well as paper towels, bathroom tissue, professional soaps and more. Names you’ll have heard of include Huggies, DryNites, Kleenex and Andrex.
Kimberely-Clark dividend per share over 20 years ($)
Source: Refinitiv Eikon, 25/09/2023.
Strong brands matter when it comes to personal products. That’s something that underpins Kimberly-Clark’s ability to charge higher prices. This in turn has kept operating margins in double digits.
Margins have come under pressure in the last couple of years because of inflation, but we agree with the consensus that these will start to normalise. It is something to keep an eye on though. A failure to relaunch profitability could see the valuation come under pressure.
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Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article isn’t a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
This article hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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