Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

INVESTORS looking for income have had no shortage of options this year. 

The yields on low-risk bonds and cash have risen in line with central bank rates and are at levels not seen for many years. Against that backdrop, company shares offering dividends to shareholders have struggled to stand-out.  

The headline income yield on the UK’s FTSE 100 remains near its long-run level at 3.89% - below many cash savings accounts - but underneath that figure there are companies whose dividend yield looks much more attractive. The challenge for income-hunters is to separate out the yields that will prove sustainable from those that won’t. 

We asked the expert dividend stock-pickers from the team behind Fidelity’s MoneyBuilder Dividend Fund to identify a short-list of shares with not only attractive levels of income, but the potential for dividend and capital growth as well. 

Treasures and traps: the yield challenge 

Yields on some of the country’s best-known companies look high right now - as high as 9% or 10% in some cases. That should make the job of finding a healthy income easy, right? Unfortunately, no. For example, Vodafone would yield 10.88% based on last year’s dividends. The trouble is no-one expects those dividends to be maintained in the long run, while Vodafone’s share price has been hammered this year so investors have lost capital value along the way as well. 

It’s not as simple as looking for high yields, which at a headline level tend to be based on dividends paid in the past. Income investors also need to form an understanding of where the dividend is heading in the future and whether or not a company can grow their capital as well - there’s not much use to a high dividend if share price falls wipe it out. 

Our expert picks - and why they chose them 

The MoneyBuilder Dividend Fund looks for companies with strong and growing dividends - aiming to produce an income 10% above that of the FTSE All Share - but with an eye on capital growth as well. The stocks featured here all feature in the fund. 

Led by portfolio manager Rupert Gifford, the MoneyBuilder Dividend team look at several measures to establish their view. The metrics highlighted here help support their positive view of each stock, but they are not exhaustive. Some further explanation of the choices is below 

 

Forward 12m dividend yield 

1-year dividend growth 

Payout ratio 

HSBC 

8.11% 

28% 

43% 

Reckitt Benckiser  

3.34% 

5% 

56% 

National Grid 

5.63% 

4% 

85% 

RELX 

2.31% 

10% 

65% 

Mondi 

4.07% 

8% 

29% 

Source: Fidelity International / Bloomberg - 02 August 2023 

The ‘Forward 12m dividend yield’ is the percentage yield expected to be produced based on dividends expected in the 12 months from 31/07/2023. This is different from the ‘trailing yield’ that is often quoted for company shares and which is based on previously paid dividends. The forward yield is predicted and not certain. 

The ‘1-year dividend growth’ is the percentage growth in the dividend over the company’s last financial year. The ‘Payout ratio’ is a percentage to express how much of the company’s net income  - after costs and tax - is paid out as dividends.  

Both the dividend growth and payout ratio figures are based on the company’s 2022 annual statements.
 

HSBC 

The UK bank can boast the most eye-catching forward yield on our list, helped by recent strong performance that has seen shareholder rewards revised upwards. HSBC has ridden the rise in central bank rates which has had the effect of improving its lending margins. 

Its dividend is well-covered by earnings and management recently confirmed a fresh $2bn share buy-back which will also be to the benefit of shareholders.
 

Reckitt Benckiser 

Reckitt Benckiser is behind some of the biggest brands in health, hygiene and nutrition. Think Durex, Harpic and the baby formula Endamil. The company is undergoing repositioning to improve performance but the results have been difficult to see amid volatility caused by COVID. 

The MoneyBuilder Dividend team now expect the company to enter the delivery phase. Sales growth of around 5% is expected coupled with margin expansion that could lead to 6-7% growth in earnings-before-tax. 

The shares trade at around a 10% discount to peers but this is expected to close as evidence of more consistent delivery builds.
 

National Grid 

The investment case for National Grid is that the transition from fossil fuels will require enormous amounts of investment in electrical grids, initially in transmission and subsequently for local distribution, which means that National Grid faces a multi-decade strong growth outlook.  

Combined with a 5.63% dividend yield, the MoneyBuilder team believes this can provide a 13% annualised total return even without any increase in its relatively low valuation 12-times price-to-earnings.  

Regulated returns on its network are set in real terms so financials are inflation protected. This is also reflected in the company’s dividend policy which is to grow dividends in line with the consumer price index (CPI).
 

RELX 

RELX provides businesses with tech-based analytics and tools to help them manage their risks. Income-hunters might at first be underwhelmed by the company’s forward yield of just 2.31% but the stock is well-liked by fund managers for its dependable revenues coupled with exposure to the high-growth area of Artificial Intelligence, where RELX is well-placed.
 

Mondi 

Mondi provides the paper packaging for all sort of everyday deliveries. It specialises in ‘kraft paper’ which is enjoying extra demand from the rise of e-commerce and tougher environmental regulation on other types of packaging.  

The MoneyBuilder Dividend team like Mondi’s bias to ‘virgin containerboard’, which allows higher quality finish and printing options, and thereby higher potential returns. 

Shares have underperformed on cyclical headwinds, but the business remains attractively positioned over the long-term with high-quality, low-cost paper. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. 

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