A dividend cut is an income investors worst nightmare, especially if youre living off the income. Unfortunately, most of the time, dividend payouts are cut without much warning, and its not possible to accuratelypredict every dividend cut before it happens,
That said, you can try to reduce the risk of being caught by surprise.
Market screen
Every month, analysts at investment bankSocit Gnraleput out a list of companies that theybelievehave some of the most secure dividend payouts in developed equity markets.
The banks analysts screen the market for companies that have a dividend yield of more than 4%, have a strong return on capital and robust balance sheet. All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen.
This month there were only seven UK companies that made it into the top 40 qualifyingcompanies. Here are four of the UKs top seven dividend stocks according toSocit Gnrale.
Pass the test
NEXT (LSE: NXT)is one ofSocit Gnrales top income stocks due to its return on capital of 59% and strong balance sheet.
Whats more, the company is focused on returning cash to investors. Next year, analysts believe that the companys shares will support a dividend yield of 5% as regular dividends are set to be complemented by special payouts. The company has also been buying back stock this month after the market punished its shares following a lacklustre Christmas trading update.
Over the past six years, NEXTs dividend payout has risen at a rate of around 18% per annum.
Housebuilding boom
After recovering from the 2009 crisis,Persimmon (LSE: PSN) now has all the qualities of a top income stock.
Persimmon is set to support a dividend yield of 5.4% next year, and the payout is set to be covered 1.7 times by earnings per share.
At the end of June 2015, the company had just under 280m of cash with no debt, giving it enough capital to maintain its current dividend payout for two years if business dries up. City analysts expect Persimmons earnings per share to expand 28% this year, and the company trades at a forward P/E of 12.3.
Security in demand
G4S (LSE: GFS) may not be everyones cup of tea but according toSocit Gnrale, the company has all the hallmarks of a top income stock. G4Ss sharessupporta dividend yield of 4.2%, and the payout is covered 1.5 times by earnings per share. City analysts expect the company to report EPS growth of 14% this year and a further 10% in 2016.
G4S currently trades at a forward P/E of 15.8.
Rising returns
Lastly,British American Tobacco (LSE: BATS) is afavouriteof income funds around the world. British Americans shares currently support a dividend yield of 4.1%, and the payout is covered 1.4 times by EPS.
Socit Gnrale notes that British Americans dividend payout has, on average, increased by 10% per annum since 2009, the groups return on equity is above 50%, and the companys capital spending as a percentage of cash flow is low. The majority of British Americans profit is returned to investors via both buybacks and dividends.
More opportunities
If it’s income you’re after, as well as the four companies listed above, there are plenty of other opportunities out there.
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Rupert Hargreaves 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.
