Reinvesting dividends for the long term is what separates the serious investors from those just playing at it, and Im always on the lookout for high yields and the FTSE 100 is overweight with them right now, with more yields above 6% than Ive seen for some time. But a dividend has to be believable and sustainable, and a temporary high yield alone is not enough.
Cash from banks
Im generally bullish about the banking sector, so what about the 6.5% dividend yield forecast from HSBC Holdings (LSE: HSBA) for this year? And with the 533p shares on a forward P/E of only 10, is there capital appreciation to come too? HSBC kept its Q3 dividend at 10 cents per share, but that tells us nothing much as its policy is to keep any annual variation for the final quarter.
The obvious caution is that HSBCs dividend would only be covered 1.6 times by earnings. To put that into perspective in these more austere times, the 3.6% expected from Barclays in 2016 would be more than thrice covered. And the longer term danger comes from China, of course, which could hamper HSBCs profits for years to come.
No, for me, Barclays and Lloyds Banking Group are the banks to buy, and Id eschew larger but riskier short-term dividend yields like HSBCs.
In the insurance sector, Admiral Group (LSE: ADM) looks an intriguing prospect. It pays around half of its annual dividend as a special payment, which makes it perhaps riskier than relying on ordinary dividends but then, Admiral has been consistent, and plenty of ordinary dividends have been slashed in the sector in recent years.
The total yield from Admiral is forecast at 6.4% this year, even after a 12-month share price rise to 1,580p. That would soak up the bulk of earnings, but Admiral is up with the utilities companies in focusing on cash returns to investors and has an enviable record of keeping it flowing.
On top of that, theres takeover fever in the air, and after Mitsui Sumitomos pounce on Amlin, could Admiral be a future target? Takeover possibility or not, Admiral looks good for income seekers.
A future for miners?
And then we come to beleaguered BHP Billiton (LSE: BLT), whose shares have lost a further 26% over the past 12 months to 1,190p as the mining slump continues although the price has been picking up in recent weeks. One thing the price fall has done is push BHPs forecast dividend yield up, and its currently standing at an estimated 7.8%.
Thats a stunner, but it does come after a 50% fall in EPS in the year to June 2015 and on the back of a similar fall forecast for the current year. That would being EPS down to little more than half the predicted dividend payout, and I think those relying on that level of cash are going to be disappointed.
I reckon BHP has a good long-term future, but Ill be close to eating hats if the dividend is not cut.
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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.