Temple Bar Investment Trust (LSE: TMPL) has delivered 31 consecutive years of dividend increases, having lifted its latest annual payout by 3%. The trust has a trailing yield of 3.2%.
Picking great dividend shares has helped Temple Bar outperform the FTSE All-Share Index over the past three, five and 10 years.
Not too many equity income funds currently have three banks in their top 10 holdings especially with one of those banks not presently paying a dividend! But HSBC (LSE: HSBA), Lloyds (LSE: LLOY) and dividend-less Royal Bank of Scotland (LSE: RBS) all feature in Temple Bars top 10.
Going against the crowd
Temple Bar takes a contrarian approach, and sees little value in a number of areas of the market that are currently popular with dividend investors. For example, in its latest annual report, the trustsaid of utilities:
We believe investors have been attracted to the high dividend yields of utilities. However, these dividends are typically financed partially out of debt rather than cashflow and, therefore, in our view, are not as attractive as they initially appear. Utilities remain highly capital intensive companies continually at risk of political intervention and these dividends may prove less secure than investors believe.
Another swathe of popular dividend stocks quality businesses are also currently off the menu for Temple Bar:
Many of these companies are found in consumer facing sectors such as food, drink, tobacco, personal care and household products. After many years of strong performance, this group of companies is priced as highly as it has been for decades, yet it is questionable whether its future is as bright as its past.
With so many popular dividend areas of the market rejected, its perhaps not surprising that Temple Bars contrarian approach where value can often take some time to emerge has led the trust to see an opportunity in banks.
HSBC
HSBCs shares reached a post-financial-crisis high of pushing 8 in 2013. But theyve been nearer 6 since, as penalties for past misdeeds have rumbled on, new scandals have surfaced and fears about Chinas economy have weighed on sentiment.
As a result of the depressed share price, the dividend yield is high 5.4% forecast for this year, rising to 5.6% next year. The dividend is covered a reasonable 1.6 times by forecast earnings. HSBC could do with getting its costs down its taking steps to do so and could offer good value today for long-term investors.
Lloyds
Temple Bar has been invested in Lloyds since before the companys resumption of dividends, noting shortly before the restart that the Black Horse moves ever closer to paying a dividend. Once reinstated, this could grow quickly and it is conceivable that the company will have a 5% yield within two years.
Lloyds shares have lately been making new post-financial-crisis highs. However, investors today could still get Temple Bars hoped-for 5% yield within two years on a small pull-back in the shares or a modest upgrade to the analyst consensus forecast. As things stand, the consensus gives a 3.2% yield this year, rising to 4.8% next year.
RBS
Royal Bank of Scotland is behind Lloyds in its recuperation from the financial crisis by perhaps a year or two. RBS may or may not be able to resume dividends this year, and not all analysts are optimistic for 2016. As a result, theres a lowly 1.5% yield forecast for 2016 covered a whopping 4.7 times by forecast earnings, compared with Lloyds 1.9 times and HSBCs 1.6 times.
At some point, RBS should get into the position Lloyds is currently in. And, at its current share price which has gone nowhere for a couple of years the Scottish bank has the potential for a similarly high dividend payout to Lloyds, for patient investors, such as Temple Bar.
Picking tomorrow’s big dividend winners isn’t always easy. Which is why the Motley Fool’s top analysts have written a must-read FREE guide: “How To Create Dividends For Life“.
In this exclusive guide, you’ll discover how dividends can provide the foundations for more dependable returns, and 5 Golden Rules for Building a Dividend Portfolio.
This free guide comes with no obligation — simply click here and it’s yours with our compliments.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended 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.