When stock markets are in turmoil and share prices are going up and down, one of the best things to do is stick to high dividend shares and sit out the ride, happy that youre getting a steady annual income. In fact, thats a pretty good strategy whatever the markets are doing, I reckon.
On that score, today Im looking at two big yielders that present an intriguing contrast.
The first is Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands. Along with the other power utilities, Centrica is known for paying out a substantial portion of its annual earnings as dividends usually around two thirds.
Earnings dipped in 2014 by 28%, and theres a further smaller drop on the cards for the 2015 year just ended, and thats led to a fall in the dividend from 17p per share in 2013 to a predicted 12p for 2015 results are due on 18 February. But on todays 191p share price, that would still bring you a yield of 6.3%, with the forecast 2016 yield up to 6.5%.
That big yield is due to the share price having fallen, but even if youd bought your shares at their April 2014 peak of 345p, youd still be looking at likely yields of 3.5% and 3.6% for 2015 and 2016 respectively and if thats as low as your yield gets during hard times, its really not too bad.
And the best way to invest in shares like Centrica, in my opinion, is regularly over a long period that way youll benefit from pound-cost averaging, and once dividends start rising again youll enjoy higher effective yields based on the price you pay in the dips.
My second for today is Aberdeen Asset Management (LSE: ADN), which is a very different company indeed. As an investment manager specializing in emerging markets, the Chinese slowdown has contributed to 11 quarters in a row of net cash outflows, and thats triggered a share price collapse at 225p today, Aberdeens shares are down 55% fromtheir peak in April 2015.
But one thing that has done is pushed up the prospective dividend yield for this year to a massive 8.8%. As it stands, that would only be covered 1.2 times by forecast earnings, so its clearly at risk. But Januarys first quarter update provided reasonable confidence for the firms long-term future. Although the three months saw a net outflow of 9.1bn, total assets under management had actually risen to 290.6bn between September and December.
Aberdeen has a progressive dividend policy, and has been raising its annual payment far in excess of inflation in recent years. A cut in the cash may well be inevitable over the next couple of years, but theres plenty of room for that while still keeping a yield thats way ahead of the market average.
And if emerging markets are going through a downturn, well, a bit of volatility is only to be expected. And Aberdeen has plenty of experience of dealing with it while maintaining a very prudent approach to financial management. On a forward P/E of only 9.7 for 2016, Aberdeen Asset Management shares look like a long-term buy to me.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management and Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.