Finding the markets best income stocks isnt easy. Indeed, you shouldnt buy a stock just because it has a high dividend yield, without first assessing the underlying business and sustainability of the payout.
A dividend cut is an income investors worst nightmare. And most of the time, dividend payouts are cut without much warning.
Still, there are some stocks out there that offer higher-than-average dividend yields that are sustainable; you just need to know where to look.
Income and growth
Santander (LSE: BNC) cut its dividend last year to save cash, but even after cutting its payout the bank still supports a dividend yield of 4.2%. The payout is covered two-and-a-half times by earnings per share, so it looks safe for the time being.
Whats more, according to City figures Santanders earnings per share are set to expand at a rate of 7% to 8% per annum for the next three years. According to the same forecasts, Santanders dividend payout will increase at a rate of around 10% per annum over the same period.
Over the years, Admiral (LSE: ADM) has built a reputation for being one of theFTSE 100s dividend champions.
The companys dividend record is highly impressive. Over the past fiveyears, the group hasreturned a total of 1.1bn to investors via both regular and special dividends.This works out as around 90% of Admirals net income generated over the period.
And analysts expect this performance to continue for the foreseeable future. Figures suggest that Admirals dividend payouts will total 95.5p per share for 2015 and 97.3p for 2016, equal to a yield of 6.4% and 6.5% respectively. Looking at the numbers, it seems as if analysts have hiked their dividend forecasts for Admirals by around 10% during the past few weeks.
Throwing off cash
Lastly,Aviva (LSE: AV), which is flush with cash after its merger with Friends Life earlier this year.
Specifically, the merger has left Aviva with a10.8bn capital surplus, covering thecompanys insurance commitments by more than 170%. Also,Avivas own analysts have stress-tested the companys balance sheet and believe that, even after a 20% fall in equity values, the groupseconomic capital coverage ratio will remain above 170%. Add in the fact thatas a result of the Friends Life merger, Avivas cash flow will increase by an additional 600m per annum by 2017 and you can see why Avivas management had the confidence to hikethe companys dividend payout by15% when it announced first-half results at the beginning of August.
The City believes that this dividend growth is set to continue for the foreseeable future. Analysts have pencilled in dividend growth of 17% for next year and 16% the year after. These forecasts suggest that, based on todays prices, Avivas shares will support a yield of 4.5% next year and 5.3% during 2017.
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