Dividend investing has become a really popular strategy. Thats because historic low interest rates mean income investors have increasingly looked towards high yielding stocks as substitutes to low yield bonds.
Butdividend payments arent guaranteed. Already, nine FTSE 100 companies have announced cuts to dividend payouts since the start of the year. So its important to pick stocks witha high level of dividend cover and a track record of delivering dividend growth. Thesefive stocksseem to fit the bill.
Imperial Tobacco Groups (LSE: IMT) shares support a dividend yield of 4.0%, which is backed up by dividend cover of 1.5x. Imperial Tobacco benefits from steady cash flow generation and a high level of cash conversion across the business cycle, which allows it to pay a higher than average dividend yield.
Its track record for dividend growth is impressive with an average annual growth rate of 13.1% over the past five years. The dividend is supported by steadily growing earnings and, despite cigarette volumes declining for a number of years, earnings are risingbecause of price risesand cost cuts.
City analysts expect Imperial Tobaccos underlying EPS and dividend togrow by 10% next year, giving its shares a forward P/E of 15.1 and a prospective dividend yield of 4.4%.
As well as being a dividend stock, BAE Systems (LSE: BA) is a potential turnaround play. Itsrevenues have been shrinking due to cuts to defence spending by North American and European governments but trading conditions are set to improve. The UK government is increasing defence spending and other countries are likely to follow suit. Thats because of heightened terrorist alerts and the rising threat of internationalpolitical conflict.
BAEs dividend yield is currently 4.1%, and the company has maintained or increased its payout in every year since its founding in 1999. Its dividend cover is 1.9x.
Right now, Pearson (LSE: PSON) hasa respectable dividend yield of 6.9% and a forward P/E of 11.2. Butitsvaluation appears to reflect its dispiriting trend in earnings.
Competition in education publishing is expected to intensify and textbook sales are declining because of fewer college admissions. As a result, underlying earnings fell inthe past three consecutive years at an average rate of 8.3%.
However, earnings should recoverthis year with analysts forecasting underlying EPS growth of 6% and its dividend is covered 1.3x by earnings.
Expected dividend growth of 19.1%
Legal & General Group (LSE: LGEN) has delivered five consecutive years of dividend growth during which time its dividends have grown by an average annual rate of 24.0%. The company has yet to announce its final dividend for the2015 financial year but analysts expect the company will pay a total of 13.4p per share this year.
This represents 19.1% growth on the previous year and mean its shares currently trade at a prospective yield of 5.0%. Its dividend cover is 1.5x.
Jam today, jam tomorrow
At first glance, house-builder Bovis Homes Group (LSE: BVS) may not look like an ideal dividend stock. Its dividend yield is just 3.2% and housebuilding is a cyclical industry. But itsgenerating strong earnings growth and fundamentals are looking good too, with the structural shortage of housing supply likely to keep the sectors profits high. City analysts expect its dividend will grow by 14.3% this year, to 40.0p, which gives it a prospective yield of 4.0%.
Its dividend cover is 2.2x, and its set to widen to more than 2.4x this year.
More dividend stocks…
These five large-cap shares have been selected for their combination of income and growth prospects. Theygenerate stable cash flows from their dominant market positionsand broad global exposure.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.