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.
Income seekers and London-listed stocks make natural bedfellows – the FTSE 100 yields far more than America’s S&P 500 or the global MSCI World, for example (the three indices currently yield 3.1%, 1.2% and 1.6% respectively). But buying stocks for their income can be a double-edged sword because while high yields are tempting, they can also be a sign that the market senses trouble at the company concerned.
A simple ‘screen’ for a couple of easily understood metrics can help.
We performed a similar exercise last year for an article entitled Can you rely on Britain’s biggest income stocks?. A 2024 piece, How to avoid dividend cuts from the UK’s highest yielders, may also help readers steer clear of ‘value traps’.
As before, our stock screen this time features dividend cover by earnings – the degree to which profits exceed the cost of paying the dividend – as well as dividend cover by cash generation and annualised dividend growth over the past five years.
On this occasion we have focused on some FTSE 100 stocks that are due to report interim or annual results over the next couple of months.
The following table summarises the findings.
A common rule of thumb used by income investors is that dividend cover by earnings should be at least 2. It seems sensible to want at least the same from dividend cover by cash flow.
Finally, those who use dividends to fund retirement will want a decent yield (1% or 2% is unlikely to be sufficient return on their hard-acquired savings) as well as good dividend growth each year to counter the effects of inflation.
You can see from the table that there tend to be trade-offs between, for example, yield and dividend growth, but with luck investors will be able to identify some stocks that meet their needs.
Naturally our screen is only a starting point and readers are advised to conduct further research before they commit money. Our own online data is a good starting point; if you are interested in Tesco, for example, there is a wealth of information here.
Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. 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. 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. 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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